The U.K.’s new Treasury chief ripped up the government’s economic plan on Monday, dramatically reversing most of the tax cuts and spending plans that Prime Minister Liz Truss announced less than a month ago and raising new questions about how long the beleaguered British leader can stay in office.
In a televised address, 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 crum
bling authority and fueled calls for her to step down before her despairing Conservative Party forces her out.
Truss’ spokesman said the prime minister and Hunt had jointly agreed on the 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.
Scrapping Truss’ plan to reduce the basic rate of income tax by 1 percentage point, Hunt said “it is a deeply held Conservative value — a value that I share — that people should keep more of the money that they earn.”
“But at a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut.”
Such major policy announcements are normally made first in the House of Commons. However, after an agreement with the speaker of the House, it was left to Hunt — rather than Truss — to deliver the calming message to the markets, weeks earlier than he had planned.
Hunt was appointed Friday after Truss fired his predecessor Kwasi Kwarteng, who spent less than six weeks in the Treasury job. Truss and Kwarteng jointly came up with a Sept. 23 announcement of 45 billion pounds ($50 billion) in unfunded tax cuts that spooked financial markets, sent the pound to record lows and forced the Bank of England to take emergency action.
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 Oct. 31.
On Monday he 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.
Hunt’s moves are aimed at restoring the 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.
He spent the weekend in crisis talks with Truss, and also met with Bank of England Gov. Andrew Bailey and the head of the government’s Debt Management Office.
The unfunded tax 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.
It remains to be seen whether the message will hold the line among investors.
“Fiscal credibility is hard won but easily lost. Today’s announcements won’t be enough by themselves to plug the gap in the government’s fiscal plans,″ said Paul Johnson, the director of the Institute for Fiscal Studies think tank. “Nor will they 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.″
The early response from the markets was positive.
The pound rose more than 1% to above $1.13 in London. That pushed the U.K. currency back above where it was trading on Sept. 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% from 4.327% on Friday. It was 3.495% on Sept. 22. Bond yields tend to rise as the risk of a borrower defaulting increases and fall as that risk declines.
The financial fiasco has turned Truss into a lame-duck prime minister, and Conservative lawmakers are agonizing about whether to try to oust her. 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 serial ethics scandals ensnared his administration.
“A new fiscal broom is sweeping away the mess of the old mini-budget but it looks increasingly likely that it will also eventually wipe out the brief prime ministerial career of Liz Truss,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
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 an election would be a wipeout for the Tories, with the Labour Party winning a big majority.
Many Conservatives believe their only hope is to replace Truss — if the party can agree on a replacement.
The prime minister’s spokesman, Max Blain, denied Truss was leader in name only and that Hunt was now in the driver’s seat.
“The prime minister and the chancellor discussed these measures and agreed them over the weekend,” he said.
Blain said Truss “has acknowledged we went too far, too fast with the mini-budget” — though in a statement, Downing Street pinned the blame for its U-turns on a worsening global economic picture rather than any reaction to the measures.