Jeremy Hunt has ripped up the UK government's medium-term fiscal plans in an attempt to drag markets back onside and rescue Liz Truss's ailing premiership.
He reversed almost all the measures set out in Kwasi Kwarteng's tax giveaway mini-budget which had resulted in the collapse of the pound and a spike in borrowing rates.
He dramatically scaled back support for household energy bills and ditched promised tax cuts, saying the country needed to generate confidence and stability before it could seek to grow the economy. He signalled public spending cuts are on the way.
The chancellor was installed on Friday after Ms Truss sacrificed Kwasi Kwarteng following weeks of market turmoil which have jeopardised her short tenure in Downing Street. Mr Kwarteng survived just 38 days as chancellor — the second shortest tenure in the post ever.
On Monday, Mr Hunt issued an emergency statement intended to reassure markets and set the government on a new course. He said the changes were to reduce “unhelpful speculation” about his planned changes which will be set out in full in two weeks' time.
The pound strengthened and UK government bonds rallied shortly after Mr Hunt laid siege to the mini-budget. Sterling rebounded by more than 1.2 per cent to 1.139 against the US dollar.
Yields on 30-year government bonds, or gilts, eased back further by around 10 per cent, as the new chancellor set out plans to shave off billions of government debt.
It is the start of what may be a particularly torrid week for UK assets, with the beleaguered Ms Truss battling to rescue her premiership as mutinous backbenchers plot to oust her.
In a televised address, Mr Hunt announced:
· The government will scrap plans to reduce the basic rate of income tax from 20 per cent to 19 per cent in April next year, a move that had been forecast would cost the Exchequer almost £5.3 billion ($5.92bn) in 2023-24.
· Help with energy bills for all households will only last until April, with Mr Hunt announcing a review to look at a “new approach” to target support at those worst off after that. While he had been expected to reverse some of the tax cuts, the change to the energy support scheme had been unexpected.
· The government will ditch plans for new VAT-free shopping for international tourists.
· Cuts to dividend tax rates and the reversal of off-payroll working reforms will not go ahead.
· The government will continue with its planned cut to stamp duty and its reversal of the 1.25 percentage point increase in national insurance contributions.
Mr Hunt said: “No government can control markets but every government can give certainty about the sustainability of public finances, one of the many factors that influence how markets behave.”
He warned more difficult decisions lie ahead on both tax and spending.
He said: “Growth requires confidence and stability and the United Kingdom will always pay its way.”
Regarding the basic rate of income tax, Mr Hunt said it will now stay at 20p until economic conditions allow a reduction.
The rate had been due to fall to 19p from April under Kwasi Kwarteng’s mini-budget, a year earlier than Rishi Sunak had planned.
“It is a deeply held Conservative value — a value that I share — that people should keep more of the money that they earn,” Mr Hunt said.
“But at a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut.”
Ms Truss's fate could be sealed by the mood of markets in the wake of Mr Hunt's screeching reversal of the mini-budget and her own backbench MPs who fear their seats will be lost in a general election.
Ms Truss is Britain's fourth prime minister in six years, already 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.
Mr Hunt moved swiftly at the weekend to set out his new direction, with some MPs saying he was now the “de facto prime minister”.
There were concerns the markets would blow another hole in the UK's economic plans when they opened on Monday, the first day since the Bank of England withdrew its bond-buying support.
The battered pound and UK government bonds rallied on Monday ahead of Mr Hunt’s emergency statement after the Treasury issued a 6am statement saying Mr Hunt would announce further details of his plans this morning, followed by a statement in the House of Commons later in the day.
But analysts warned the positive market news might only provide a temporary reprieve.
“Trussenomics may have been ripped up and fed to the shredder but the author of the big gamble remains in power, and has the final say on the direction of travel,’’ said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“Investors are craving more stability but, given the flip-flopping we’ve had so far in her super-short tenure, economic policy uncertainty remains and that’s likely to be the key driver in the bond markets and on foreign exchange desks,” she said.
The Treasury said Mr Hunt's move — two weeks earlier than scheduled and coming after talks at the weekend between Mr Hunt and Ms Truss — was designed to “ensure sustainable public finances underpin economic growth”.
“Strong start by Jeremy Hunt as chancellor,” Mel Stride, the Conservative MP who chairs parliament's Treasury committee, said on Twitter ahead of Mr Hunt's statement.
“Gets what needs to be done and is acting fast. Surprising markets positively on the upside with an early statement to House of Commons today is a wise move. Message is: ‘We get what needs to be done and it’s being sorted.'”
Sir Roger Gale, a backbench Conservative MP, told Sky News: “I think Jeremy Hunt has taken on the job … on his own terms.
“He’s said he will do it, but he will only do it if he can do what he believes to be necessary to stabilise the markets, to stabilise the economy and to get the show back on track … There is real power in Downing Street, but it’s not in No 10, it’s in No 11.
“I think Jeremy Hunt is de facto prime minister at the moment.”
Former Tory chief whip Andrew Mitchell claimed Ms Truss has just two weeks left to save her premiership.
Pressed on whether Ms Truss would lead her party into the next general election, Mr Mitchell told Times Radio: “I think the next two weeks will be critical in determining the answer to that question.”
Labour's shadow chief secretary to the Treasury said Mr Hunt's move was “evidence of the panic in government”.
Pat McFadden told BBC Breakfast: “The reason [Mr Hunt] is doing this is because ministers are terrified of what happens when markets open this morning.
“It is testament how much chaos has been caused by Liz Truss since she became prime minister.”
The measures come as Ms Truss continues to fight to hold on to her leadership, with three Conservative MPs already breaking ranks to call on her to go.
Crispin Blunt, Andrew Bridgen and Jamie Wallis all called on the prime minister to quit on Sunday, while other senior figures within the parliamentary party expressed deep unease with her leadership but stopped short of calling for her to go.