Hunt shelves UK tax cuts and signals scaled back aid on energy

Chancellor of the Exchequer Jeremy Hunt ripped up what was left of Prime Minister Liz Truss’s controversial economic program, scrapping tax cuts and removing support for household energy bills to restore order to the public finances.

The package of £32 billion of savings fell short of the £70 billion that economists say the government needs to find to rebuild its credibility among investors after soaring inflation and sputtering growth gutted tax revenue.

Together with earlier U-turns, the decisions reverse almost all of the £45 billion in tax cuts and giveaways Truss announced in early September, raising questions about whether she can survive in office. Hunt signalled he’s likely to make more severe spending cuts in the weeks ahead.

“There will be more difficult decisions, I’m afraid, on both tax and spending as we deliver our commitment to get debt falling as a share of the economy over the medium term,” Hunt said, adding that the priority will be on protecting “the most vulnerable.”

Hunt will give further details to the House of Commons at 3:30 p.m. in London on Monday. He also intends to deliver a full fiscal plan on October 31.

The markets responded favourably to news that Hunt would be making a statement. The pound gained more than 1% and government borrowing costs dropped. Hunt will be hoping the improvements are reinforced as better growth prospects and lower market interest rates will also help repair the fiscal damage.

His statement this morning included:

• maintaining the basic rate of income tax at 20% indefinitely instead of reducing it as planned, saving £5 billion
• scrapping planned cuts in dividend taxes, saving £1 billion
• maintaining alcohol duties instead of making cuts
• The current price freeze, capping the average bill at £2,500 a year, will be reviewed in April, when it will be redesigned so that it’s more targeted
• reinstating rules on contract workers, saving £2 billion
• removing a tax-free shopping break at a savings of £2 billion

Since taking over the Treasury three days ago, Hunt has been outlining a radically different fiscal approach from Truss, saying taxes would have to rise and spending would have to be cut. That was part of a bid to prevent further punishing increases in UK government borrowing costs, but they go against pledges made by Truss during the Conservative Party leadership campaign.

What Bloomberg economics says …

“Taking into account the latest moves in gilt yields, we estimate this measure gets only part of the way to putting debt back on a sustainable track. At least £28 billion more savings or revenue raisers are still needed.

The UK’s standing in markets may have been permanently harmed, and Bank of England Governor Andrew Bailey has indicated that interest rates will need to stay higher than previously expected. Here’s what we think will be needed from the government and the BOE to limit the damage.” –Jamie Rush, Bloomberg Economics.

Truss has already been forced into a series of U-turns since investors dumped the pound and gilts after her call for £45 billion ($50 billion) in unfunded tax cuts. She fired Kwarteng and shelved plans to freeze corporate tax and lower the top rate of tax.

Bloomberg Economics calculates there is a budget hole ranging from £28 billion to £50 billion to fill, depending on the pace of debt falling.

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