Pound, shares and UK government bonds rally after most mini-budget tax cuts ditched – business live | Business

Jeremy Hunt has not yet done enough to plug the gap in the government’s fiscal plans, warns Paul Johnson, head of the Institute for Fiscal Studies.

Last week, the IFS estimated that £60bn of savings were needed to get debt falling as a share of GDP, while there are reports that the Office for Budget Responsibility sees a £70bn black hole.

Johnson says:

Either way, today’s £32bn of tax rises would only take the Chancellor part way there. The fact that today’s announcements alone are unlikely to be enough is a measure of the scale of the problems we face.

But if the outlook for the cost of government borrowing improves, the fiscal gap will shrink – potentially by £7bn, Johnson explains:

Early indicators suggest that gilt rates may be reduced by perhaps as much as 0.5 percentage points. If this were to be sustained, and extend to a correspondingly lower path for Bank Rate, OBR ready reckoners suggest that debt interest spending would be reduced by around £7bn a year.

Having undone the big package of tax cuts Mr Hunt might now be able to delay big decisions on public spending – but still need to show a credible fiscal plan, Johnson concludes:

That is likely to involve at least some cuts to planned investment and day-to-day spending. There are no easy options here.

It is hard to see which of the big chunks of spending – health, pensions, welfare, education and defence – can be cut.

With the mini-budget consigned to history, economists and investors are concluding that Liz Truss’s term in office might soon be over too.

Charles Hepworth, investment director at GAM Investments says calm has returned to markets, thanks to Jeremy Hunt’s announcements….and expectations of a new PM soon as well.

All of this is due to the screeching handbrake turn in the Truss economic motorcade now that a new driver is at the wheel. Chancellor Hunt’s immediate efforts to get out on the front foot, bring forward his plans, and importantly, more openly, is a stark contrast with the previous Chancellor’s almost embarrassed, muffled, and tone-deaf performance.

“Almost all of PM Truss’s economic vision is gone and most of her leadership election promises. The income tax cut plan has been shelved indefinitely and the UK energy support scheme will apply now for just six months. Gone are virtually all the unfunded tax cut promises from the previous Chancellor and markets are of the view that soon so too will be the original architect of the failed mini-Budget.”

Paul Dales, chief UK economist at Capital Economics, says Hunt has essentially wiped out Truss and Kwarteng’s plans:

Altering Truss’s flagship policy in this way is the surest sign yet that Liz Truss won’t be Prime Minister for long. After all, pretty much everything she has done in the past 42 days has now been reversed by Hunt over a long weekend.

Uncertainty over Truss’s position as PM could mean more volatility for the pound, warns Fawad Razaqzada, market analyst at City Index and FOREX.com

Investors are wary of the political situation, which remains tense, and a lot could still change. For now, there is a bit of hope that Jeremy Hunt will help bring the country’s public finances back in order. But his work is undermining under-pressure PM Liz Truss, who some argue is on borrowed time.

As a result, traders remain very cautious, and thus unwilling to commit in one or other direction. This should mean continued volatility for sterling.

During the Conservative party leadership race, Liz Truss criticised Rishi Sunak for raising taxes to their highest level in 70 years.

But today’s junking of Truss’s mini-budget means that taxes are still heading towards the highest level since the early 1950s, seven decades ago.

Resolution Foundation has worked out that taxes, as a share of economic output, are on track to hit 36%:

Torsten Bell, chief executive of the Resolution Foundation, says the speed of the turnaround under Jeremy Hunt is ‘stark’:

This is now very clearly a tax raising parliament, with the tax take set to reach highs not sustained since 1950. The price of shielding the public finances from wholesale gas markets next year is more pressure on households, with the energy price cap now on course to hit £4,000 next April – almost double its effective level today.

“These are tough choices being made by the new Chancellor, that will reduce the scale of public spending cuts set to be announced on 31^st October – even more so if they lead markets to reduce the interest rates they charge government for borrowing.

“But, with tens of billions of spending cuts still to come, and a new energy support package needing to be devised, many of Jeremy Hunt’s tough choices still lie ahead.”

Hunt’s decision to downgrade Liz Truss’s two-year energy price freeze to just six months will shock struggling families, say Laura Suter, head of personal finance at AJ Bell.

“Scrapping all but six months of the Energy Price Guarantee will send shockwaves through households in the UK, who are once again going to be exposed to soaring energy prices and the prospect of a struggle to pay their bills.

The indication from Mr Hunt is that help will be targeted at those who need it the most from April onwards, rather than universal support regardless of income.

However, there’s no guarantee that the support will be meaningful after April.”

Suter also explains that abandoning the cut in the basic rate of income tax will cost taxpayers up to £377 a year in additional tax compared to Liz Truss’ previous plans.

“That sound you can hear is the death knell for Trussonomics, with the vast majority of her tax cutting plans now consigned to the bin. People have had yogurt in their fridge that’s lasted longer than some of the Government’s planned tax cuts, and it’s clear that Liz Truss has opted to have one last attempt at saving her skin by ditching her economic principles rather than try to cling on to her policy plans.

“But many Tory party members who voted for her will wonder what the point of Truss is without Trussonomics, particularly as she now has the unwelcome moniker of the most unpopular Prime Minister in recent history.

There will now be big questions around the stability of Liz Truss’ position.

Chancellor Hunt’s sweeping dismissal of his predecessor’s mini-budget should allow the Bank of England to raise interest rates less aggressively, experts say.

But uncertainty over Liz Truss’s future, following the ditching of much of her economic plan, will continue to create volatility in the markets.

So warns Richard Carter, head of fixed interest research at Quilter Cheviot, who explains:

“Jeremy Hunt has achieved the first step in returning some semblance of credibility to the government’s economic reputation as the bond markets have welcomed his announcement.

It is quite remarkable that it took an almost complete scrapping of the mini-budget announced just over three weeks ago. However, that credibility is still incredibly fragile and much of the government’s next moves will depend on the OBR forecasts being produced at the end of this month.

They won’t make for pretty reading but following this announcement should give investors some confidence that the UK’s finances are on a more stable footing.