UK markets rise as new chancellor axes Truss’ tax and spending plans

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British Chancellor of the Exchequer Jeremy Hunt walks outside Downing Street in London, Britain, on Monday (17) - Henry Nicholls/Reuters
By Eshe Nelson

LONDON – Britain’s pound and government bonds rose Monday (17) as the nation’s new finance minister said he was reversing almost all of the tax and spending plans of Prime Minister Liz Truss that were announced a few weeks ago and sent markets into turmoil.

Jeremy Hunt, the Chancellor of the Exchequer, on his third full day in office, said he was cancelling most of the tax cuts announced by his predecessor on Sept. 23. He also dismantled part of Truss’ first landmark policy — a cap on household energy bills that was set to last through to 2024. Hunt said he would only guarantee that bills would be frozen until April.

The decisions were a huge capitulation to pressure in financial markets, where the British pound fell to a record low against the dollar and government bond yields soared, pushing up home mortgage rates and government borrowing costs. The tumult was precipitated by Truss and her previous chancellor, Kwasi Kwarteng, pledging widespread tax cuts, including for the highest earners, that would be funded by borrowing. Investors rebuffed the plans, anticipating they would worsen Britain’s inflationary problem and put the nation’s debt on an unsustainable path.

“We will reverse almost all the tax measures announced in the Growth Plan three weeks ago that have not started parliamentary legislation,” Hunt said in a televised statement Monday morning, adding that he was focused on bringing about economic stability.

Bond prices climbed Monday, pushing the yield on 10-year bonds from 4.3% down to 3.94% Friday. The pound rose about 1% against the dollar, to nearly $1.13.

Hunt who was set to give a statement in the House of Commons Monday afternoon, said he wanted to give a summary of the announcements early because they were “market sensitive”.

Among the scrapped measures, Hunt said he would indefinitely postpone a plan to cut the lowest income tax rate in Britain.

“At a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut,” he said.

Hunt’s efforts to calm markets began even before bonds started trading Monday.

Two surprise statements issued early in the morning showed the extent of the nervousness among British officials about whether markets were about to begin another week of turmoil: The Treasury said Hunt would bring forward by two weeks some measures to “support fiscal sustainability,” and the Bank of England issued a statement reiterating that it had ended its bond-buying intervention in the market that helped pension funds, but that other measures were still in place to support liquidity.

Monday was set to be a day of judgment for Britain in the financial markets. It marked the first trading session since the central bank ended a program that spent more than 19 billion pounds (about $21 billion) buying bonds to end dysfunction in the market over the past 2 1/2 weeks. It also was an opportunity for investors to reappraise the plans for Britain’s public finances, after the previous chancellor, Kwarteng, was sacked Friday (14) and some of the government’s recently announced tax plans were undone.

The Treasury statement began to soothe financial markets, as bond prices (which move inversely to yields) and the pound continued to trade higher after Hunt’s announcement.

But investors haven’t completely reversed their moves since the Sept. 23 statement, even though most of the policies have been dumped. Britain’s bond yields remain significantly higher, reflecting the uncertainty ahead about the government’s credibility. For example, five-year yields were trading at 3.91% Monday, up from 3.56% Sept. 22.

Hunt said that scrapping the tax cuts would raise 32 billion pounds. But to bring debt levels down a gap in the public finances would still need to be plugged. The new chancellor warned that “difficult decisions” would need to be made on spending, with every government department being asked to find more cuts, despite their already stretched budgets.

Meanwhile, speculation is growing that Truss may not be able to hold onto her position as prime minister much longer, now that her tax-cutting agenda has been left in tatters.

A full “medium-term fiscal plan”,  which will include how the government plans to reduce Britain’s debt burden and the “difficult” spending decisions that will be made, will still be delivered Oct. 31, alongside an independent assessment on the economic and fiscal impact of the policies by the Office for Budget Responsibility, a government watchdog.

“No government can control markets, but every government can give certainty about the sustainability of public finances and that is one of the many factors influencing how markets behave,” Hunt said Monday.

-New York Times

 

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