UK’s new finance minister scraps nearly all planned tax cuts in bid to appease markets

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Jeremy Hunt is interviewed for Sophie Raworth’s ‘Sunday Morning’ at the BBC Broadcasting House in London.

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LONDON — Britain’s Finance Minister Jeremy Hunt used his first working Monday to announce that almost all of the controversial tax measures announced by his predecessor would be reversed.

The major U-turn includes the removal of the cut in the lowest income tax rate from 20% to 19%, as well as reductions in dividend tax rates, the reversal of non-payroll labor reforms, the recovery of VAT for tourists and freezing of tax rates on alcohol.

Hunt said reversed tax cuts totaled £32bn ($36bn) a year.

The only fiscal policies of former finance minister Kwasi Kwarteng are the cancellation of the planned hike in National Insurance, a general tax, of 1.25%; and a reduction in taxes paid on property purchases.

Markets applauded the announcement, with sterling trading up 1% against the dollar shortly after inception. By 4:55 p.m., it had risen 2.3% to $1.143.

UK government bond yields also fell sharply, with the 10-year yield trading down 36 basis points to 3.965%. Yields move inversely to prices.

Hunt also announced that the energy package designed to subsidize consumer and business energy bills would only run until April and then be revised to “cost the taxpayer much less than expected”.

Under the current plan, the government caps the amount paid per kilowatt-hour for gas and electricity at below market rate amid rising wholesale prices. The average household is now expected to pay £2,500 a year, still up from the average annual bill of £1,400 in 2021, but well below the £4,650 that had been predicted without intervention.

“A central responsibility for any government is to do what is necessary for economic stability,” Hunt said in a brief statement Monday morning.

“No government can control the markets, but every government can provide certainty about the sustainability of public finances. This is one of the many factors that influence the behavior of the markets. For this reason, although the Prime Minister and I myself have both pledged to cut corporation tax, on Friday she listened to concerns about the mini-budget.”

Hunt addressed lawmakers in the House of Commons on Monday afternoon, saying “many tough decisions will be announced” when he releases a new budget plan and economic forecast from the UK Office for Budget Responsibility on October 31.

While the major announcements were made in the morning, due to what Hunt called their “market-changing” nature, he added that the government was setting up an Economic Advisory Council to provide “economic advice independent experts”. It will include former Conservative aide Rupert Harrison; Gertjan Vlieghe and Sushil Wadhwani, former members of the Bank of England’s Monetary Policy Committee; and Karen Ward, Chief Market Strategist for EMEA at JPMorgan Asset Management.

Prime Minister Liz Truss did not answer questions in the Commons and had been absent since the start of the session, with Commons Leader Penny Mordaunt saying she was busy with “urgent business”.

Market Chaos

The government had already been forced to do an about-turn on both its plan to scrap the top income tax rate and scrap a planned rise in corporation tax from 19% to 25%.

On Friday, Truss sacked Finance Minister Kwarteng less than six weeks after the couple took office, appearing to blame the chaos wrought in financial markets by the budget he announced on September 23.

It included planned unfunded tax cuts totaling £45billion, which were touted by Truss and Kwarteng as a radical plan to boost the UK’s sluggish economic growth and were a key part of the campaign for the leadership of Truss.

However, markets were spooked by a range of factors, including the prospect of significantly higher government debt given impending subsidies on consumer and business energy bills, and the perceived mismatch between the current monetary tightening of the Bank of England to control inflation and the government’s stimulus plan. The lack of economic forecasts from the Office for Budget Responsibility also weighed on the markets.

The decline of the pound against the dollar throughout the year accelerated and British government bonds, known as gilts, sold off spectacularly. The Bank of England launched a temporary bond-buying program to support the market, which ended on Friday, largely to protect liability-driven investment (LDI) funds – many of which are owned by pension plans – collapse.

Apart from the potential effects of a weaker pound, the public was also hit by market volatility as mortgage offers were withdrawn and mortgage rates soared as lenders weighed further expectations of higher mortgages. rate.

John Gieve, former deputy governor of the Bank of England, told the BBC on Monday morning that Treasury leaks showed Britain’s deficit approaching £70billion.

“Hunt has realized that even if he cuts public spending, he won’t be able to balance the books doing that,” he told the ‘Today’ show. “So he can’t afford the kind of tax cuts, even the £25billion that’s left on the table.”

Inflation “higher for longer”?

Paul Dales, chief UK economist at Capital Economics, said Hunt had scrapped the Truss/Kwarteng package in a bid to reassure markets that the government had some fiscal discipline.

This appears to be working, with most of the pound’s rise and the sharp decline in gilt yields earlier in the day supported,” he said in a note.

“But while the Chancellor has reduced budget uncertainty, by ensuring utility prices will only be frozen until April 2023 instead of October 2024, he has introduced more economic uncertainty.”

Dales said that means inflation could be higher for longer, real household incomes could fall more sharply and any recession could be deeper.

“There are a lot of moving parts, but our current forecast that interest rates will drop from 2.25% now to 5.00% and GDP will fall 2% during a recession doesn’t seem that far off the mark. reality,” he added.

The latest UK inflation figures are due on Wednesday.

“Today was probably an admission that you can’t do things on the hoof without thinking about the market reaction,” Tim Sarson, UK head of tax policy at KPMG, told “Squawk Box Europe from CNBC.

Sarson said there was little evidence that Truss’s form of “trickle down” economics, which sees lower taxes as a way to spur growth and increase overall prosperity, was effective, or that changing tax rates was the most important factor in determining the success of an economy.

Even setting that aside, Truss’ approach was particularly flawed, he said.

“It was just the way it was done, the lack of clear costs, the fact that it was done at a time when public finances are strained by the need to support energy consumers, and at a time when global interest rates and gilt yields are rising, there couldn’t have been a worse time to start experimenting with this kind of trickle-down policy,” Sarson added.

Meanwhile, Paul Johnson, director of the Institute for Fiscal Studies, told CNBC’s Arabile Gumede that the announcement and cancellation of the tax cut had caused long-term damage to the economy.

“There’s definitely a long-term damage because there’s been more uncertainty, there’s a lack of stability in politics. What you’ve seen the current chancellor do is try to reaffirm that certainty and that credibility, but once that credibility is lost, it’s very difficult to regain it. And the government is doing everything it can to regain it right now,” Johnson said.

Long-term damage to UK from failed tax cuts, says leading think tank

Farm position uncertain

The ruling Conservative Party hopes the arrival of Hunt, who served as health and foreign secretary but was a so-called backbench MP until Friday, will give the government a much needed boost.

Political polls show the party plunging to levels not seen since the 1990s and Britons also face a tough winter with higher prices.

There have been media reports of dissatisfaction with Truss’ premiership from her own MPs just 40 days since she took office. However, under current Conservative Party rules, a new leadership election cannot take place for 12 months.

Former Prime Minister Boris Johnson has announced he will step down on July 7 after a wave of resignations by senior ministers.

Correction: Paul Dales is Chief UK Economist at Capital Economics. An earlier version misrepresented its title.

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