Hunt’s economic plan sends UK back on the road to austerity
IN his first few days as the UK’s new Chancellor of the Exchequer, Jeremy Hunt has managed to placate the nervous markets somewhat, even as his new economic plan is sending Britain firmly on the road back to austerity.
Ripping up virtually all the libertarian growth policies of British Prime Minister Liz Truss in his presentation to a rowdy parliament on Monday (Oct 17), Hunt not only reversed almost all of her tax cuts but warned that government spending had to be slashed too. He said that it would take “eye-watering difficulty” to balance the books.
Only two portions of the original “mini Budget” by Hunt’s predecessor Kwasi Kwarteng were retained - a reversal of the national insurance contributions increase, and the cut in stamp duty. The cut in the basic rate of income tax is off the table, and a freeze in alcohol duties from next February is no longer going ahead. Hunt also scrapped a cut in the tax on dividends, and changes to tax rules for the self-employed.
These measures are on top of last week’s surprise announcement that corporate tax would return to 25 per cent (from 19 per cent) in April 2023, and the u-turn on removing the 45 per cent top rate of income tax. All in, these are expected to reduce the government’s financial black hole by £32.2 billion (S$51.6 billion).
What’s more, Hunt said the government’s subsidy on soaring energy bills would come to an end next April. As things stand, this subsidy will already cost a whopping £60 billion if gas prices don’t come down.
His harsh measures are forecast to raise the UK’s tax burden to its highest level since 1950, while already stretched departments and local authorities will be forced to cut back on their expenditure. More details will come when a new Budget is announced on Oct 31.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Underlying the fact that Britons are in for a bleak period ahead, Hunt has appointed a council of economic advisors headed by Blackrock fund manager Rupert Harrison, the architect of former chancellor George Osborne’s austerity policies between 2010 and 2016. They will work with officials from the Bank of England (BOE) and the Office of Budget Responsibility.
Government bonds and shares rallied the day after Hunt’s speech. On Tuesday morning when the markets opened in the UK, the pound was trading at $1.136 to the US dollar, slightly below Monday’s peak of $1.144, but still 3.7 per cent above the low recorded on Oct 12.
Over the same five-day period, long term gilts have rallied by 8 per cent and the yield on ten-year gilts have fallen from 4.47 per cent to 4 per cent, slightly above Monday’s low of 3.96 per cent. The FTSE100 index of UK multinationals was up 4 per cent and the FTSE250 index of mainly local companies rallied by 6.9 per cent.
Several investment banks including Goldman Sachs have predicted that the UK will soon enter a recession, and this has caused the BOE to retreat from its promised steep interest rate hikes. An economic decline could cause the pound to weaken even further, analysts said.
In a resounding speech in Parliament on Monday, Rachel Reeves, the Shadow Chancellor of the Exchequer, castigated the Conservative government for the damage caused to the public, citing examples such as the increase in mortgage rates that are now over 6 per cent.
Meanwhile, it’s still a big question mark if Truss will remain in the top job by the time Hunt delivers the new Budget on Oct 31, with some observers predicting that she may not even last until the end of the week. Truss’ ratings have plummeted to negative 51 points, while the latest round of polls places the Tory party at 36 points behind Labour.
“I do want to accept responsibility and say sorry for the mistakes that have been made,” Truss admitted in an interview with the BBC. “I wanted to act, to help people with their energy bills, to deal with the issue of high taxes, but we went too far and too fast.”
Copyright SPH Media. All rights reserved.
