Markets welcome UK’s reversal of tax cuts

Jeremy Hunt

The British pound and UK government bonds rose on Monday after new finance minister Jeremy Hunt scrapped Prime Minister Liz Truss’s economic plan — reversing nearly all of the UK government’s promised tax cuts — and cut back on her enormous energy subsidy.

Under the new plan, most of Truss’s £45 billion of unfunded tax cuts will be scrapped and a two-year energy support scheme for households and businesses, expected to cost well over £100 billion, will now only run until April.

The move is one of the biggest-ever U-turns in British fiscal policy as the UK government attempts to regain the confidence of the bond and capital markets.

The UK government has faced a bond market rout that has raged since the government announced the huge unfunded tax cuts on September 23.

Hunt has now reversed all of the policies that helped Truss become elected as prime minister just under six weeks ago.

However, the future of the current UK government remains uncertain as political analysts say Truss has all but lost her power.

“I remain extremely confident about the UK’s long term economic prospects as we deliver our mission to go for growth,” said Hunt.

“But growth requires confidence and stability, and the United Kingdom will always pay its way.”

The pound rose by as much as 1.4% to a session high of $1.1332 after the statement.

UK government bonds rallied but the yield on the 10-year gilt is still 46 basis points above its closing level on September 22, the day before Truss’s now infamous “Growth Plan” shocked the capital markets.


AJ Bell Investment Director Russ Mould: “The sigh of relief in Downing Street this morning would likely have been audible halfway down Horse Guards Parade as investors reacted positively to new Chancellor Jeremy Hunt’s rescue mission.

“Gilt yields have fallen sharply, the pound is higher and unless Hunt stuffs up his early trailer of new fiscal measures, it seems the government has bought itself some breathing room with the financial markets. This is particularly reassuring given the Bank of England has, officially at least, concluded its intervention in the gilt market.

“Longer term there are big questions about the impact of what looks like being hefty real-terms cuts to public services. However, in the short-term, Hunt, like a professional problem solver brought in to steady an ailing business, seems to have done what was required. Even if it meant tearing up much of the mini-Budget and starting again.

“The FTSE 100 is steady, no mean feat given it is not helped by the relative strength in the pound, and housebuilders are higher amid hopes the mortgage markets might start to stabilise.”

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown: “With the government in special measures, no part of the Truss administration’s plans are immune from being ripped down and thrown out in the quest for stability.

“As the UK government has dramatically climbed down, the pound has been wracked with a fresh bout of volatility falling back from above $1.13.

“But crucially government borrowing costs have crept further down, with 10-year gilt yields dipping below 4%.

“The Prime Minister’s authority is now so diminished that even her centrepiece strategy to alleviate the cost-of-living crisis is being sharply curtailed with the freezing of household energy bills coming to an end in April. What was meant to be two years of support has been slashed to just six months.

“The cost to the government was potentially open ended given the volatility in energy prices, and that with unfunded tax cuts piled on top amid escalating inflation, was what spooked the markets.

“A bonfire of her tax plans is ablaze with only the reversal of the National Insurance rise and the stamp duty cut surviving the flames.

“There will no longer be a cut to dividend tax rates, the cut in the basic rate of income tax has been postponed indefinitely and there will be no changes to the way self-employed people are currently taxed.

“The freeze on alcohol duty rates will be scrapped and the tax-free shopping scheme for tourists will also be axed. These measures will help make up a £32 billion pound black hole in the government’s finances.

“A new fiscal broom is sweeping away the mess of the old mini budget into but it’s also looks increasingly likely that it will also eventually wipe out the brief Prime Ministerial career of Liz Truss.’’

Victoria Scholar, Head of Investment, Interactive Investor: “The markets are responding positively to the new Chancellor’s plans to reverse almost all of the tax cuts announced by his predecessor Kwasi Kwarteng in the mini budget on 23rd September.

“Jeremy Hunt’s focus on reassuring the markets and reinstating confidence appears to have worked so far with gilt yields trading lower and sterling pushing higher. The FTSE 100 is staging gains with utilities and housebuilders, the most budget-sensitive sectors outperforming as Trussonomics is unwound with the reversal of the biggest tax cuts in 50 years.

“Although we heard about Hunt’s tax plans, spending question marks remain until the medium-term fiscal plan is announced on 31st October when the Chancellor will outline how he plans to cut government spending in order to plug the multi-billion pound budget shortfall, raising concerns about the prospect of a new era of austerity.

“The retreat in gilt yields and sterling’s appreciation should help to settle the mortgage market and offset some of the UK’s imported inflationary pressures, possibly requiring less aggressive interest rate increases from the Bank of England at its next monetary policy committee meeting at the start of November.”

Joshua Raymond, director at online investment platform “We’ve seen the markets react positively to the Chancellors’ statement. The pound has gained against every major currency today including 0.5% against the US dollar and euro.

“Long dated gilt yields have fallen sharply with the 30yr bond yield dropping by more than 0.4%. The statement provides some much needed clarity ahead of the OBR forecasts due out in two weeks time.

“Perhaps the largest news is the earlier cut off to the energy price cap to April next year. This is a significant development both financially and politically.

“Financially, the energy price cap is one of the largest contributions to the black hole in the fiscal budget and gives the government more headroom for tighter fiscal cuts especially should a global recession force energy prices lower than expected in the medium term.

“Politically however it’s devastating for the Liz Truss premiership. It’s a complete reversal on every single major political pledge she has made to date and as a result, her political authority is most likely at an end.

“In a matter of days, I expect the market focus to shift more towards who replaces Liz Truss as Prime Minister of the UK. Liz Truss today became Prime Minister in name only.”

Richard Carter, head of fixed interest research at Quilter Cheviot: “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.

“All eyes now turn to the Bank of England and its next policy move. Hunt’s statement should reduce the need for the BoE to raise rates as aggressively as it might have done, but it is still struggling to bring inflation down and as such will need to act in some shape or form.

“With further pressure being placed on businesses and households and the long-term challenges of slowing growth, the risk of policy mis-step only grows.

“In the short-term, however, this raises serious question marks over the future of the Prime Minister and as such further political volatility lies ahead for markets.”

British Chambers of Commerce Director General Shevaun Haviland: “The Chancellor’s buzzword was stability. But what we’ve seen from him is a plan for today and nothing for tomorrow.

“Following the economic turmoil of the last few weeks he had to press the reset button.

“But businesses will be dismayed by the decision that looks set to strip back the energy support for firms from next April. This will be a hammer blow for many who were already worried about how they will survive.

“The government must commit to a full consultation with firms ahead of that cliff-edge to provide some certainty on where any targeted support will go. Energy costs keep business owners awake at night, alongside rising inflation and interest rates.

“Keeping support for the NICs reversal in place will be some relief for hard-pressed firms, but on its own will not be enough.

“The Chancellor has a delicate balancing act to carry out. He must restore order to the markets if he is to prevent further damage to business and consumer confidence. But if he is serious about stability and growth, he must speak to our Chamber Network to truly understand the pressures firms face.

“People run businesses and businesses rely on people. The Government is failing to fully understand that the cost of living and cost of doing business crises are two sides of the same coin.  We still need a clear vision on how it will support firms and the communities that rely on them to thrive.

“It must be clear in how it plans to do this, to prove it is serious about helping businesses through the difficult months ahead. Time is of the essence.”

James Richard Sproule, Chief Economist UK at Handelsbanken: “The new UK Chancellor Jeremy Hunt has executed an almost complete reversal of the tax cuts that had been announced by his predecessor Kwasi Kwarteng in his Fiscal Statement on 23 September.

“Chancellor Hunt expects these tax changes to raise an additional GBP 32 billion annually. If the ratio of debt to GDP is to fall, a further GBP 40 billion in tax rises/spending cuts must be identified.

“Departments are being asked to meet with the Chancellor in coming weeks to identify where these costs savings might be found:

” – The headline rate of income tax is no longer to fall to 19 percent, but will remain at 20 percent indefinitely.

” – Corporation tax was at 19 per cent and was due to rise to 25 percent, Kwarteng’s fiscal statement reversed this plan. This rise to 25 per cent will now go ahead, meaning the UK’s corporation tax will be above the OECD’s 23 percent average.

” – The energy price support which was due to last for two years (eg through the expected date of the next general election) will instead last for 6 months and be reviewed by the Treasury again next spring. The cost of this measure remains extremely dependent on the overall price of gas, which has fallen considerably since initial cost forecasts were put together in August, although they do remain well above recent ‘norms’. The inflationary impact of having consumers and businesses fully exposed to the market price for energy are such that we expect some ongoing form of support to be announced in due course.

” – The reductions to Stamp duty on house sales will be retained (it has already been implemented). Our expectation is that this will fail to support the housing market as buyers are already going to be struggling with sharply higher debt costs.

” – The biggest tax reduction to survive this most recent Fiscal Statement is the reversal of the 1.25 per cent National Insurance rise brought in in April of this year. This is a material change as it means that upwards of GBP 14 billion will be left in consumers pockets. When first announced this tax change led to a revision of our overall GDP forecast from expected recession, to very slow growth, in 2023.

“A full set of reports from the Office for Budget Responsibility will accompany the Chancellor’s budget statement on 31 October …

“The expected path for UK interest rates have been very volatile in recent weeks, at one point topping 6 per cent in May of next year; expectations have now subsided to 5.1 percent. We make every effort to try and discern the Bank of England’s longer term outlook and last week we moved up our expectation for the rates to reach 4 per cent in early 2023, and remain there for much of 2023 and 2024.

“Our view remains that if interest rates were to rise to the levels implied by investors in recent weeks, it would trigger a severe recession and that inflationary pressures would collapse along the way. The BoE’s mandate is to counter inflation …

“We are also of the view that the program of active Quantitative Tightening (QT) which had been due to start on 1 October and has now been put back to the start of November, is likely to be further delayed until calmer markets conditions prevail. This most likely means Jan 2023 at the earliest. The program of passive QT, not impacting the supply of Gilts on the market, is set to continue, although the next bonds are not due to mature until well into next year.”

deVere Group CEO Nigel Green: “Jeremy Hunt has ripped up almost every policy on which Liz Truss was elected just weeks ago to lead the Conservative Party and become Prime Minister.

“Amongst other things, he has dropped the plan to cut the basic rate of income tax from 20% to 19% and has torn up the government’s two-year energy bill freeze.

“He says his measures, along with the previous decision not to cut corporation tax and the reversal of the abolition of the 45p top rate of tax, will raise £32bn per year …

“Markets appear reassured for now. The pound gained and gilt yields dropped as the new chancellor set out his emergency measures aimed at stabilising the extremely choppy waters of the last couple of weeks.

“However, we expect that the new measures to calm financial markets will only work temporarily.

“The massive loss of credibility cannot be regained all that rapidly. U-turns and abandoning landmark economic policy after economic policy does not inspire investor confidence and trust.

“Rather it smacks of humiliating economic incompetence.

“Now investors are sensing that Liz Truss faces a leadership challenge within days as her own colleagues, who are worried about losing their seats, plot how to remove the Prime Minister and replace her with another senior Tory.

“The Prime Minister is on course to be the UK’s shortest-serving leader in history – and this all creates further uncertainty which will be translated into heightened market volatility …

“Despite Jeremy Hunt’s emergency intervention – which basically means the ripping up of the mini budget – investors sense that the recent enormous turmoil in financial markets has been inflicted by the government and was utterly avoidable.

“Although a safer pair of hands is now in charge at the Treasury, I suspect that brewing political chaos and heightening uncertainty around Liz Truss’s leadership will again trigger market jitters.”

Tom Gilbey, equity research analyst at Quilter Cheviot: “The energy price guarantee and the energy bill relief scheme that were welcomed with open arms just weeks ago have already seen dramatic change, with the new Chancellor announcing today that these measures will only remain in place until April 2023 as opposed to the two years the government had initially promised.

“While the measures will still help families stay warm and keep businesses open this winter, concerns surrounding future affordability will no doubt have made a swift return.

“The measures previously announced were generous and provided reassurance to households and businesses alike, but the lack of clarity over who would pay the bill – which was set to cost up to £150bn – became its ultimate downfall. The new Chancellor, Jeremy Hunt, has been quick to tear up the list of tax cuts and spending promises announced by Kwasi Kwarteng in his mini-budget, and it is therefore understandable that the costly energy bill support will take a hit as a result.

“Going forward, the Treasury-led review announced this morning must be thorough and needs to provide a resolution that goes far enough in helping people, while also being something the government is able to stick to.

“While Hunt has committed to providing support for those most in need and promised that the new approach will better incentivise energy efficiency, we can be certain that the level of support available after April 2023 is unlikely to be anywhere near as generous as the former package.”

Daniele Antonucci, Chief Economist & Macro Strategist at Quintet Private Bank: “Newly-appointed Chancellor Hunt announced that the UK government will reverse “almost all” of the mini-budget tax cuts that have not already started the parliamentary process, raising an extra GBP 32 billion per year.

“Hunt also confirmed that the energy price guarantee, as originally announced, will only last until April. This is the big surprise in today’s announcement, in our view.

“The other important point, from a market perspective, is that the corporation tax will rise from 19p to 25p and a cut to the lower rate of income tax of 1 percentage point April will be delayed.

“While gilt yields are tumbling, government borrowing costs remain far above the level of about 3.75% seen before last month’s GBP 45 billion of unfunded tax cuts triggered significant market uncertainty and a liquidity crisis for UK pension funds.

“We’ve previously argued that volatility is and can stay high, or even increase if the fiscal plan or its implementation is perceived to be not credible in the marketplace. Markets’ reaction appears to be positive at this stage, but we’ve seen last Friday quite a reversal later in the day.

“What’s more, we’re watching both the political situation and the economic one, with UK GDP now beginning to shrink and a recession that’s not yet fully priced in.

“Another important driver we’re monitoring is that the Bank of England emergency bond-buying programme to shore up gilt-exposed pension funds is no longer in place and a big rate hike at the November meeting is very likely, given that the inflation picture remains rather worrying at this stage.”

Sam North, market analyst at eToro: “Bond markets and Sterling are already moving this morning in response to the Chancellor announcing a fresh update.

“This was seemingly deliberately announced very early this morning to feed to markets before open. The economic policy of the UK is now essentially all playing out to tame the bond market, which is now effectively governing the direction of Government policy.

“The reason the Chancellor is announcing reversals now instead of waiting for the OBR on the 31st is to try and move the dial on debt costs so the situation don’t look quite as bad in a couple weeks’ time when the full forecasts are given. Hunt is doing everything he can to lessen the black hole in the public finances. We more or less know the substance of the announcement – everything is likely being junked except stamp duty and NI cuts which have already been implemented.

“In terms of personal finances, the damage is already done to the mortgage market but now households will have to contend with having less cash thanks to tax cuts being waved then taken away in the space of three weeks. It’s a worst-case scenario for everyone, households are going to have higher taxes and mortgage rates while businesses aren’t going to get the regulatory burden relief promised by Truss, plus they now face higher tax as we enter a recession. This may be the tonic to get inflation down but it is going to cost livelihoods and squeeze households budgets to get there.”