The Chancellor’s Emergency Statement

Following the sacking of Kwasi Kwarteng last week, we examine the new Chancellor’s statement and the implications for Ms. Truss and the country.

This morning Jeremy Hunt, the new Chancellor of the Exchequer, made a bold statement on immediate tax and spending plans of the Government. Following the turbulent market conditions from the mini budget, the new Chancellor looked to deliver a sizeable u-turn on recent fiscal policy.

Mr Hunt tore up almost all parts of Prime Minister Liz Truss’s proposed tax cuts, saying the measures would help the government raise around £32 bn a year.

“We will reverse almost all the tax measures announced in the Growth Plan three weeks ago that had not started parliamentary legislation,” Mr Hunt said.

“A central responsibility for any government is to do what’s necessary for economic stability. This is vital for businesses making long term investment decisions and for families concerned about their jobs, their mortgages and the cost of living.

“No government can control markets, but every government can give certainty about the sustainability of public finances, and that is one of the many factors that influence how markets behave.” He stated.

The short address, which preludes a later address to Parliament, sought to spell out the new direction of fiscal policy.

What stays:

1. Cuts to stamp duty and national insurance remain in place
2. No stamp duty is now paid on the first £250,000 of a property’s value for all buyers in England and Northern Ireland; for first-time buyers it is £425,000
3. National Insurance contributions increased by 1.25% in April but this is still being reversed next month

What goes:

1. Planned 1p cut in basic rate of income tax put on hold indefinitely – rate will remain 20%.
2. Energy price guarantee will no longer last two years – it will last until April next year and then be reviewed to save money and better target support
3. Dividend tax cut will be abolished
4. VAT-free shopping for visitors and alcohol duty freeze both scrapped
5. Reforms to off-payroll working rules – also known as IR35 rule changes – will no longer be repealed

The markets

The Truss administration has been criticised widely in recent weeks for the Government’s fiscal plans. Since the mini-budget’s announcement, the country has seen a sharp fall in the pound and interest rates on UK government bonds on the rise. The resulting economic turbulence has placed Ms Truss in the spotlight only a few weeks after entering Number 10 Downing Street.

The deepening economic trouble forced the Prime Minister’s hand in acting to events, sacking former Chancellor, Kwasi Kwarteng last week.

It is not yet clear if Mr Hunt’s clear divergence in fiscal policy will help calm markets in the long-term. Nevertheless, the markets have responded positively in the immediate hours following the announcement.

The pound rose and government borrowing costs fell as investors welcomed the news that Chancellor Jeremy Hunt is reversing almost all tax measures set out in the mini-budget.

Sterling extended early morning gains against the dollar, and is now trading at around $1.13.

The news also saw the interest rate on UK government bonds fall, making government borrowing less expensive.

The yield on bonds due to be repaid in 30 years’ time, which dropped when markets opened on Monday morning, fell further after Hunt’s statement, to 4.35%.

Meanwhile, the yield on bonds due to be repaid in five years’ time, which underpins the cost of new five-year fixed rate mortgages, also fell to 3.86%.

The Truss administration

The Chancellor’s announcement has left the Prime Minister in a precarious position. On one hand, the reversal of her government’s largely unpopular fiscal policies will be welcomed by many and presumably the markets – which responded negatively to the mini-budget. The political headwind approaching the Prime Minister certainly required action from Ms. Truss to divert from her economic plan.

However, as she has given in to the political pressure to revert nearly all previous tax policies, the Chancellor’s new strategy certainly undermines her authority.

Her economic vision has been tried and quickly reeled back in, with many commentators suggesting this undermines her mandate to take the country forward, following Boris Johnson’s resignation earlier this year.

With the current discourse across Westminster suggesting her days are numbered, the fall out of Mr Hunt’s statement will be watched closely by all.

Outlook

For the public, the new fiscal plan will have varying implications for different households across the UK. The new Chancellor’s approach is centered on fiscal responsibility whilst deviating from the economic libertarianism of his predecessor.

For energy, the Government’s Energy Price Guarantee will now only cover this Winter, as opposed to the two years originally in place. Mr Hunt’s decision to install a review for the Government’s policy instead of continuing the price cap leaves the future of energy bills uncertain.

The basic rate of income tax will remain at 20p with no plans to reverse the cuts to national insurance. Mr Hunt did however warn that further spending cuts will be needed in the immediate future.

Final thought

The Chancellor’s statement this morning is a huge U-turn on fiscal policy, perhaps the biggest change of course the country has ever seen. The movement away from the libertarian economic doctrine, which won over Conservative members but riled up economic markets and parliament, places Ms Truss in trouble. On one hand, the move to install a more moderate Conservative as Chancellor and to give in to the outcry has certainly bought her time. However, it’s difficult to see anything other than a clear undermining of her authority. Her mandate was shaky follower the leadership contest – with the u-turn further shifting the sands beneath her feet.