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LONDON — Britain’s new finance chief tore up the government’s economic plan on Monday, 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 further 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 its flagship energy policy and its promise, reiterated just last week, that there would be no cuts in public spending.
While the reversal calmed financial markets and helped restore the government’s economic credibility, it further undermined the PM’s rapidly crumbling authority and fueled calls for her resignation before her desperate Conservative Party urged her to resign.
Truss declined to attend the House of Commons to answer a question from the leader of the opposition on the economy, and sent the leader of the House of Commons, Penny Mordaunt, to take her place. Mordaunt dismissed a lawmaker’s suggestion that Truss “crouch under her desk” to avoid scrutiny.
“The prime minister is not under a desk,” Mordaunt said, words that would scarcely inspire confidence in the leader, who came to power just last month.
Truss’ spokesman said the prime minister and Hunt had reached a joint agreement on the economic changes. But Hunt told Conservative lawmakers that Truss “supports him to the max on tough decisions” – suggesting he has a free hand to make politics.
As Truss sat silently beside him, Hunt told lawmakers that he was nullifying Truss’ plan to cut the basic income tax rate by 1 percentage point and most of their other libertarian economic policies. In a message aimed squarely at reassuring financial markets, he said the UK is “a country that funds our promises and pays our debts”.
“And if that continues to be challenged, as it has to date, this administration will make the difficult decisions necessary to ensure there is confidence in our national finances,” Hunt said.
Such major policy announcements are usually made first in the House of Commons, but Hunt gave most of the details hours in advance in a televised statement.
Hunt was appointed on Friday after Truss fired his predecessor, Kwasi Kwarteng, who had served less than six weeks at the Treasury. Hunt is trying to restore the Conservative government’s credibility for sound fiscal policies after Truss and Kwarteng unveiled a plan for tax cuts without saying exactly how they would pay for it.
Truss and Kwarteng jointly announced £45 billion ($50 billion) in unfunded tax cuts on September 23, which immediately spooked financial markets. The cuts fueled investor concerns about unsustainable levels of government borrowing, driving up government borrowing costs, raising mortgage rates and sending the pound to all-time lows against the dollar. The Bank of England was forced to step in to protect pension funds, which were suffering from bond market volatility.
Over the weekend, Hunt dismantled that economic plan. The government had already abandoned parts of its tax cut plan and said it would issue a medium-term financial statement on October 31, weeks earlier than originally planned.
Hunt continued on Monday. He lowered a cap on energy prices to help households pay their bills. It will now be reviewed in April, rather than taking two years – and in doing so scuttling one of Truss’ signature plans to help Britons face a livelihood crisis as food, fuel and mortgage prices soar .
Hunt told lawmakers the measures he announced would save £32billion a year but that spending cuts were also ahead.
“I’m afraid there are still many difficult decisions to announce,” he said in the detailed budget statement on Oct. 31.
Hunt also said he was establishing a new Economic Advisory Council of economists and investment bankers to inform policymakers — a far cry from Truss’ offer to jettison economic “orthodoxy.”
The pound rose more than 1% to above $1.13 in London following Hunt’s morning announcement. That pushed the British currency back above where it was trading on September 22, a day before Kwarteng announced tax cuts.
10-year Treasury bond yields, an indicator of the government’s borrowing costs, fell to 3.947% from 4.327% on Friday. On September 22, it was 3.495%. Bond yields tend to rise when a borrower’s risk of default increases.
Paul Johnson, director of the Think Tanks Institute for Fiscal Studies, said Monday’s announcements would not be “sufficient to undo the damage caused by the debacle of recent weeks. But they are big, welcome, clear steps in the right direction.”
The financial fiasco has turned Truss into a lame prime minister. She took office just six weeks ago after winning a party election to replace Prime Minister Boris Johnson, who was ousted in July after ethics scandals engulfed his government. Many conservatives now believe their only hope is to replace Truss.
The Conservative Party still commands a large majority in Parliament and has – in theory – two years before a national election has to be held. Polls suggest that holding an election now would spell obliteration for the Tories as Labor would win a large majority.
Labor Party economics spokeswoman Rachel Reeves said Truss is “barely in office and she’s certainly not in power,” claiming the Conservatives are unable to solve the problems they are creating.
“They set everything on fire. Now they insist everything is fine,” she said. “The truth is that 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 retailer IG, said markets were reassured by the presence of Hunt, a former British foreign secretary and health chief.
“I think in a way markets would prefer things to just stay the way they are for a while,” he said. “OK, the Prime Minister found her authority quite limited. But at least you have the chancellor almost in power to rule the country…
“I think they are quite comfortable with this somewhat strange situation at the moment.”
Jo Kearney contributed to this story.
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