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The UK’s new Treasury chief has ripped up the government’s economic plan, dramatically reversing most of the tax cuts and spending plans that new Prime Minister Liz Truss announced less than a month ago. The move raises more questions about how long the beleaguered British leader can stay in office.
Chancellor of the Exchequer Jeremy Hunt said he was scrapping “almost all” of Truss’ tax cuts, along with her flagship energy policy and her promise - repeated just last week - that there will be no public spending cuts.
While the reversal of policy calmed financial markets and helped restore the government’s economic credibility, it further undermined the prime minister’s rapidly crumbling authority and fueled calls for her to step down before her despairing Conservative Party forces her out.
Truss declined to attend the House of Commons to answer a question on the economy from the leader of the opposition, sending House of Commons leader Penny Mordaunt in her place. Mordaunt denied a lawmaker’s suggestion that Truss was “cowering under her desk” to avoid scrutiny.
Jeremy Hunt was appointed Chancellor of the Exchequer following the resignation of Kwasi Kwarteng. Photo / Victoria Jones, via AP
“The prime minister is not under a desk,” Mordaunt said, words hardly likely to inspire confidence in the leader who only came to power last month.
Truss’ spokesman said the prime minister and Hunt had jointly agreed on the economic changes. But Hunt told Conservative lawmakers that Truss “backed him to the hilt in making difficult decisions” - suggesting he has a free hand to make policy.
With Truss sitting silently beside him, Hunt told lawmakers that he was cancelling Truss’ plan to reduce the basic rate of income tax by 1 percentage point and most of her other libertarian economic policies. In a message aimed squarely at reassuring the financial markets, he said Britain was “a country that funds our promises and pays our debts.”
“And when that is questioned, as it has been, this government will take the difficult decisions necessary to ensure there is trust and confidence in our national finances,” Hunt said.
Such major policy announcements are normally made first in the House of Commons, but Hunt disclosed most of the details hours in advance in a televised statement.
Former British Chancellor of the Exchequer Kwasi Kwarteng, left, and British Prime Minister Liz Truss. Photo / Stefan Rousseau, via AP
Hunt was appointed Friday after Truss fired his predecessor Kwasi Kwarteng, who spent less than six weeks in the Treasury job. Hunt is seeking to restore the Conservative government’s credibility for sound fiscal policy after Truss and Kwarteng rushed out a plan for tax cuts without detailing how they would pay for them.
Truss and Kwarteng jointly came up with a September 23 announcement of 45 billion pounds ($50 billion) in unfunded tax cuts that immediately spooked the financial markets. The cuts fueled investor concerns about unsustainable levels of government borrowing, which pushed up government borrowing costs, raised home mortgage costs and sent the pound plummeting to an all-time low against the dollar. The Bank of England was forced to intervene to protect pension funds, which were squeezed by volatility in the bond market.
Over the weekend, Hunt has been dismantling that economic plan. The government had already ditched parts of its tax-cutting plan and announced it would make a medium-term fiscal statement on October 31, weeks earlier than previously scheduled.
On Monday, Hunt went further. He scaled back a cap on energy prices designed to help households pay their bills. It will now be reviewed in April rather than lasting two years - sweeping away one of Truss’ signature plans to help Britons facing a cost-of-living crisis as food, fuel and mortgage prices soar.
Hunt told lawmakers that the measures he announced would save 32 billion pounds a year, but that spending cuts were also coming.
“There remain, I’m afraid, many difficult decisions to be announced” in the fuller budget statement on October 31, he said.
Hunt also said he was setting up a new Economic Advisory Council of economists and investment bankers to help inform policy — a far cry from Truss’ bid to throw out economic “orthodoxy”.
The pound rose more than 1 per cent in London after Hunt’s morning announcement. That pushed the UK currency back above where it was trading on September 22, the day before Kwarteng announced the tax cuts.
Yields on 10-year government bonds, an indicator of government borrowing costs, fell to 3.947 per cent from 4.327 per cent on Friday. It was 3.495 per cent on September 22. Bond yields tend to rise as the risk of a borrower defaulting increases.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said Monday’s announcements would not be enough “to undo the damage caused by the debacle of the last few weeks. But they are big, welcome, clear steps in the right direction.”
Here's the story of how a £45bn tax cut became a £12bn cut.
Under the "Hunt reversals" are the ending of 2 most bizarre elements of the mini budget: introducing VAT free shopping for foreign visitors and ending effective policing of off payroll working.
The financial fiasco has turned Truss into a lame-duck prime minister. She took office just six weeks ago after winning a party election to replace Prime Minister Boris Johnson, who was forced out in July after ethics scandals ensnared his administration. Many Conservatives now believe their only hope is to replace Truss.
The Conservative Party still commands a large majority in Parliament, and - in theory - has two years until a national election must be held. Polls suggest holding an election now would be a wipeout for the Tories, with the Labour Party winning a big majority.
Labour Party economics spokeswoman Rachel Reeves said Truss was “barely in office, and she is certainly not in power”, and claimed the Conservatives could not fix the problems they had caused.
“They’ve set fire to everything. Now they insist it is all fine,” she said. “The truth is an arsonist is still an arsonist, even if he runs back into the burning building with a bucket of water.”
Chris Beauchamp, chief market analyst at online trading firm IG, said the markets were reassured by the presence of Hunt, a former foreign U.K. secretary and health chief.
“I think markets in some ways would rather things just stayed as they are for a while,” he said. “Okay, the PM has found her authority quite truncated. But at least you’ve got the chancellor in place almost running the country ...
“I think they’re quite content with that slightly odd state of affairs, for the moment.”
