LONDON, Oct 17 — New British finance minister Jeremy Hunt will set out tax and spending measures on Monday, two weeks earlier than scheduled, as he races to stem a dramatic loss of investor confidence in Prime Minister Liz Truss’s government.
Hunt is overhauling Truss’s economic programme after he replaced the fired Kwasi Kwarteng on Friday and is expected to make a statement around 11am (1000 GMT/6pm Malaysian time) to try to halt a bond market rout that has raged since the government announced vast unfunded tax cuts on September 23.
Sterling was up about 1 per cent against the dollar and British government bond prices rallied as investors hoped that Hunt would start narrowing a hole in public finances that the Sunday Times reported was as big as £72 billion (RM382 billion).
Truss, Britain’s fourth prime minister in six years, is now battling to survive in Downing Street less than six weeks after she came to power promising bold tax cuts and deregulation to reignite economic growth.
“The chancellor will make a statement later today, bringing forward measures from the Medium-Term Fiscal Plan that will support fiscal sustainability,” the finance ministry said in an unexpected statement released around 6am
“He will also make a statement in the House of Commons this afternoon.”
Truss has been forced to reverse course after markets reacted violently to her plan, hammering the value of the pound and government bond prices and forcing the Bank of England to intervene to protect pension funds.
The Bank stuck to its schedule of ending the support on Friday, adding to the pressure on Hunt over the weekend to find ways to reduce spending before the bond markets re-opened.
Investor confidence
“Strong start by Jeremy Hunt as chancellor,” Mel Stride, a lawmaker from the ruling Conservative Party who chairs parliament’s Treasury Committee, said on Twitter.
“Message is ‘we get what needs to be done and it’s being sorted’.”
Veteran Conservative lawmaker Roger Gale said the power in Downing Street now lay with Number 11, the home of the chancellor, and not Truss’s Number 10. “I think Jeremy Hunt is de facto prime minister,” he said. Hunt would still deliver a fuller medium-term fiscal plan as scheduled on October 31, alongside forecasts from the independent Office for Budget Responsibility, the Treasury said.
He met Bank of England (BoE) Governor Andrew Bailey and the head of Britain’s Debt Management Office late on Sunday to brief them on his plans, the Treasury said.
He was given a small vote of confidence early today when long-dated British government bond prices rallied on the first morning of trading without the support of the BoE’s emergency bond-buying programme that expired on Friday.
Yields on 20- and 30-year gilts slid by around 35 basis points, reversing the sharp rises seen on Friday after a statement by Truss failed to reassure investors about the government’s fiscal plans.
While in historical terms a 35 basis-point fall in yields would represent a huge rally for gilt prices, today it only put yields back to levels seen last week — a reflection of the enormous market volatility.
They remain well above the level seen before the growth agenda was announced — a measure of the deficit in investor confidence that Hunt must now address.
For its part, the Bank said today that its intervention had bolstered resilience in the sector.
“Show the markets”
Paul Johnson, the head of the Institute for Fiscal Studies, said it would be difficult for Hunt to give explicit details on spending cuts when he had only just entered the Treasury.
He told BBC radio that Hunt could indicate that the government would increase welfare payments in line with average earnings, and not the higher level of inflation, but that would be “a very big and controversial thing to do”.
Hunt, a former foreign and health minister, said over the weekend that some taxes would go up, spending would rise less than previously planned and that he hoped investors would take note of the near total U-turn in fiscal policy.
“There is one thing we can do and that’s what I’m going to do, which is to show the markets, the world, indeed people watching at home, that we can properly account for every penny of our tax and spending plans,” he told BBC television.
BoE Governor Bailey has also warned that interest rates would probably have to go up sharply next month, even with the economy likely to go into a recession soon.
Goldman Sachs said yesterday it expected Britain’s economy to shrink by 1.0 per cent in 2023, a more severe contraction than its previous forecast of a 0.4 per cent shrinkage, as Truss’s tax cuts were reversed. — Reuters
