New chancellor Jeremy Hunt scrapped Prime Minister Liz Truss’s economic plan and scaled back her vast energy subsidy on Monday, launching one of the biggest fiscal policy U-turns in British history to stem a dramatic loss of investor confidence.
Charged with halting a bond market rout triggered by the government’s announcement on Sept. 23 of huge unfunded tax cuts, Hunt has now reversed all the policies that helped Truss become Conservative Party leader and premier less than six weeks ago.
Her spokesman denied that Hunt was running the country after his new strategy of also cutting spending sent the pound soaring against the dollar and helped government bond prices start to recover from a three-week pounding.
“A central responsibility for any government is to do what is necessary for economic stability,” Hunt said in a televised statement, adding that he would “reverse almost all the tax measures announced in the Growth Plan three weeks ago.”
The former foreign and health secretary was appointed on Friday after Truss sacked Kwasi Kwarteng, her close ally.
Under the new policy, most of Truss’s 45 billion pounds of unfunded tax cuts will go and a two-year energy support scheme for households and businesses – expected to cost well over 100 billion pounds – will now be curtailed in April.
A review after that will set out a targeted scheme that will “cost the taxpayer significantly less than planned”.
Hunt said halting the planned tax cuts would raise 32 billion pounds ($36 billion) every year. The pound GBP=D3 soared by as much as 1.5% to $1.1338 at 2.33 p.m. (1333 GMT).
Economists said the measures would not plug the gap in the public finances or undo the damage done by the government’s radical policy, but were a move in the right direction.
“We have taken action to chart a new course for growth that supports and delivers for people across the United Kingdom,” Truss said on Twitter.
FIGHTING FOR SURVIVAL
Britain’s latest crisis started on Sept. 23, when the newly appointed Truss and her then-finance minister Kwarteng unveiled 45 billion pounds of unfunded tax cuts to snap the economy out of years of stagnation.
They argued that a huge increase in spending during the COVID-19 pandemic had set Britain’s tax take on course to reach its highest level since the 1950s.
But the response from bond investors who would fund the tax cuts was violently negative and borrowing costs surged. Lenders pulled mortgage offers and the Bank of England eventually had to step in to stop pension funds going under.
After scrapping one of the tax cuts, Truss fired Kwarteng on Friday, saying she accepted her plans had gone “further and faster” than investors were expecting.
Hunt then had the weekend to ditch the rest and start reviewing spending to appease the markets and prevent borrowing costs from rising further. Adding to the pressure, the BoE stuck to its plan to end emergency support on Friday.
Gilts rallied on Monday but the damage endures, with the yield on the 10-year bond GB10YT=RR still some 46 basis points above its closing level on Sept. 22. While yields for comparable German and U.S. bonds have increased over the same period, the hit to British debt remains especially severe.
The Resolution Foundation think tank said Britain was again embarked on a “tax raising economic agenda,” with typical households set to lose around 1,000 pounds of income.
Asked at a daily briefing how the prime minister could retain any credibility after forsaking the policy that secured her election by party members, Truss’s spokesman said she was listening to the public, her colleagues and to the markets.
“She is making the necessary difficult decisions to change our approach so we can provide the economic stability and maintain that stability of leadership which is important as well,” he said.
Truss’s about-turn has angered Conservative lawmakers who supported her and encouraged those who opposed her to try to find a way of removing her from power. Some have already said she must go and the opposition Labour Party has called for an election.
The fourth British prime minister in six years, Truss was only formally appointed to the role on Sept. 6.
Charles Walker, a Conservative lawmaker who is due to stand down at the next election, expected in 2024, said Truss would be told if the party has lost faith in her. He said the party now needed to get its act together.
“I can see why people are thoroughly hacked off,” he told BBC Radio. “I’m hacked off and I’m part of the performance.”
Hunt will now deliver a fuller medium-term fiscal plan as scheduled on Oct. 31, alongside forecasts from the independent Office for Budget Responsibility, the Treasury said.