When Kwasi Kwarteng and Liz Truss set out their growth plan last month, it was all about growing the economy and cutting taxes. Now Mr Kwarteng has lost his job and the new Chancellor, Jeremy Hunt, is pulling apart the PM’s economic plans.
On Friday, Liz Truss announced that she had fired her Chancellor Kwasi Kwarteng after only 38 days in the job, in a move that many have seen as an attempt to save her premiership. At the same time, she appointed Jeremy Hunt as her new Chancellor.
Mr Hunt did not lose any time. Over the weekend he stated that he will make an announcement about his economic plans on Monday.
Soon, reports came in that he will reverse most measures announced in the mini-budget by his predecessor Mr Kwarteng.
How Did We Get Here?
The economic plans that were set out in the mini-budget were meant to grow the UK economy and bring back the country from a possible recession.
But instead, the announcement had caused investors to withdraw from the UK market, which led to the pound to drop to a record low against the dollar. The Bank of England (BoE) was forced to intervene to calm the markets, which was an unprecedented move.
The opposition as well as some Tory MPs called for the reversal of the measures announced in the mini-budget and as the turmoil in the markets continued, calls for Liz Truss’ resignation grew louder.
Mr Kwarteng, the former Chancellor, quickly made his first U-turn, announcing that the proposed scrapping of the 45% income tax for the highest earners will no longer go ahead.
He also brought forward the release of his medium-term economic plan to 31 October, in the hope this will reassure the markets. It was initially planned for the end of November. He further announced that it will be accompanied by the Office for Budget Responsibility (OBR) forecast.
But on Friday, Liz Truss told the public in a short and awkward news conference, that she had fired her Chancellor. At the same time, she made another U-turn, saying that corporation tax will rise to 25%, as initially planned by Rishi Sunak.
She also at once appointed Jeremy Hunt as her new Chancellor, who supported her rival Rishi Sunak in the leadership contest, in an attempt to heal the divide in her party.
These are the challenges the new Chancellor, Jeremy Hunt, is facing. And he is prepared to tackle them head on, not least by pulling apart the economic plans Liz Truss and Kwasi Kwarteng have created.
Jeremy Hunt’s Economic Plans
On Monday, the new Chancellor made his statement about his economic plans over video in the morning and detailed his plans in the Commons in the afternoon and answered MP’s questions. This deviation from the rules was seen as necessary, given the turmoil the UK economy is in.
It was widely expected that he would tear apart the economic plans announced in the mini-budget, but he went even further.
He announced that almost all measures in the mini-budget will be reversed:
- Cut of income tax to 19% – this tax cut will no longer go ahead and will stay at 20% for the foreseeable future
- Dividend tax cut – this tax cut has been scrapped
- VAT-free shopping for non-UK visitors – this has also been reversed
- Freeze on alcohol duty – will no longer go ahead
- Reform off-payroll working rules, so called IR35 rules – no changes to these rules will be made
None of these reversals were a surprise, but the Chancellor also said that the Energy Price Guarantee will now only stay in place until April 2023. This will shock and worry many families, who again face uncertainty.
The only measures that will not be scrapped are the cut in National Insurance Contributions and the stamp duty cut. As these measures had already been voted through by Parliament, they will go ahead, the new Chancellor has said.
There will still be another statement on 31 October, in which Mr Hunt will give more details about public spending, but for now he will hope that his recent announcement will calm down the markets and provide reassurance and stability.
The Markets React
Since the announcement by Mr Hunt, the markets have reacted positively, with the sterling rising and stood at $1.13 against the US dollar at lunchtime Monday.
The short-term cost of borrowing for the Government has also dropped and now stands at the lowest since it shot up after the release of the mini-budget three weeks ago. Short-term bond yields have also fallen, which are used to price fixed-term mortgages.
The Institute for Fiscal Studies has welcomed the Chancellor’s statement as a step in the right direction. However, the fiscal body did also warn that the savings that the measures bring would not make enough savings to fill the estimated hole of £60bn. And reports suggest the OBR estimated a shortfall of £70bn.
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.Paul Johnson, Head of the Institute for Fiscal Studies
It is now glaringly obvious that Liz Truss’ economic plans are out of the window, which means uncertainty has returned for many households and small businesses. Many of which have just begun to look with more positivity into the future after the announcement of the mini-budget.