Daily Management Review

In A Dramatic U-Turn, New UK Finance Minister Hunt Reverses Truss's Economic Plan


In A Dramatic U-Turn, New UK Finance Minister Hunt Reverses Truss's Economic Plan
On Monday, British Prime Minister Liz Truss's economic plan was scrapped and her massive energy subsidy was reduced, launching one of the biggest fiscal policy U-turns in British history to stem a dramatic loss of investor confidence.
Charged with reversing all of the policies that helped Truss become Conservative Party leader and premier less than six weeks ago, Hunt has now reversed all of the policies that helped Truss become Conservative Party leader and premier less than six weeks ago.
Her spokesman denied that Hunt was in charge of the country after his new spending-cutting strategy sent the pound soaring against the dollar and helped government bond prices begin 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 minister was appointed on Friday after Truss fired her close ally Kwasi Kwarteng.
The new policy will eliminate the majority of Truss's 45 billion pounds in unfunded tax cuts, and a two-year energy support scheme for households and businesses, which is expected to cost well over 100 billion pounds, will be reduced in April.
Following that, a review will outline a targeted scheme that will "cost the taxpayer significantly less than planned."
Stopping the planned tax cuts, according to Hunt, would raise 32 billion pounds ($36 billion) per year.
Economists said the measures would not close the fiscal gap or undo the damage caused by the government's radical policy, but they were a step 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.
On September 23, the newly appointed Truss and her then-finance minister Kwarteng unveiled 45 billion pounds in unfunded tax cuts to jolt the economy out of years of stagnation.
They claimed that a massive increase in spending during the COVID-19 pandemic had pushed Britain's tax take to its highest level since the 1950s.
However, bond investors, who would fund the tax cuts, reacted violently negatively, and borrowing costs skyrocketed. Lenders withdrew mortgage offers, and the Bank of England was eventually forced to intervene to prevent pension funds from failing.
Truss fired Kwarteng on Friday after she scrapped one of the tax cuts, saying she accepted her plans had gone "further and faster" than investors expected.
Hunt then had the weekend to abandon the rest and begin reviewing spending in order to appease markets and keep borrowing costs from rising further. Adding to the pressure, the Bank of England stuck to its plan to end emergency assistance on Friday.
Gilts recovered on Monday, but the damage was done, with the 10-year bond yield remaining 46 basis points higher than its closing level on September 22. While yields on comparable German and US bonds have increased over the same time period, the impact on British debt has been particularly severe.
According to the Resolution Foundation think tank, Britain is once again on a "tax raising economic agenda," with typical households losing around 1,000 pounds in income.
When asked how the prime minister could maintain credibility after abandoning the policy that secured her election by party members, Truss's spokesman said she was listening to the public, her colleagues, and 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' U-turn has infuriated Conservative lawmakers who supported her and encouraged those who oppose her to try to depose her. Some have already stated that she must resign, and the opposition Labour Party has called for a vote.
Truss, the fourth British prime minister in six years, was only formally appointed on September 6.
Conservative lawmaker Charles Walker, who is set to retire at the next election in 2024, said Truss would be informed if the party has lost faith in her. He stated that the party needed to get its act together now.
"I can see why people are thoroughly hacked off," he told BBC Radio. "I'm hacked off and I'm part of the performance."
The Treasury said Hunt will now deliver a fuller medium-term fiscal plan on Oct. 31, along with forecasts from the independent Office for Budget Responsibility.