Jeremy Hunt has shredded the prime minister’s economic policy-Britain’s new chancellor has mollified the markets for now, but painful decisions still lie ahead(22-10-17)/Economist

Get the popcorn: it’s a British fiscal-policy statement. The government has spent the past few weeks turning announcements about taxation and spending into moments of remarkable political theatre. On September 23rd a fiscal event dubbed the “mini-budget” introduced the largest package of tax cuts in half a century. (A “medium-term fiscal plan”, eventually scheduled for October 31st, was to set out the more trivial details, like how it would be paid for.) On October 17th Jeremy Hunt, the new chancellor of the exchequer, cancelled £32bn ($36bn) of those tax cuts, ripping up virtually the whole mini-budget. Liz Truss, the prime minister and the author of the whole debacle, is a busted flush.

Mr Hunt was rushing to calm financial markets that his predecessor as chancellor, Kwasi Kwarteng, had well and truly spooked. Britain’s currency and its government debt (or “gilts”) cratered in the wake of the growth plan that Mr Kwarteng laid out on September 23rd. The gilt sell-off was so sharp that it forced some pension funds into fire sales, creating a self-reinforcing feedback loop and threatening financial stability. An emergency bond-buying programme from the Bank of England, along with Mr Kwarteng’s defenestration, went some way to restoring order. But as the central bank’s intervention came to an end on October 14th, gilt yields, which move inversely to prices, were rising ominously once again (see chart). Mr Hunt’s statement today was designed to reassure markets once and for all that the government is fully committed to fiscal responsibility.

 

It has bought some much-needed breathing-space: the 30-year gilt yield, which breached 4.8% on Friday, fell back to 4.4%. The pound, worth less than $1.12 on Friday, rose to around $1.14. But the price of all this has been the wholesale destruction of the tax-cutting agenda that brought Ms Truss to power. She had already announced the reinstatement of a corporation tax rise she had previously promised to scrap (and before that reversed a move to abolish the top rate of income). In addition, Mr Hunt today cancelled promised cuts to the basic rate of income tax and the dividend tax rate, as well as a planned freeze to alcohol duty rates and a VAT-free shopping scheme for visitors to Britain. A cut to national insurance, a payroll tax, remains (for now at least). So does a small cut to stamp duty, a tax on property transactions, as well as some other bits and pieces. But Ms Truss’s economic programme is dead. So is the philosophy that underpinned it: that tax cuts could pay for themselves by stimulating economic growth. The wing of the Conservative Party that advocates sound money is firmly in the ascendancy.

More pain is to come. Mr Hunt also promised a review of the blank cheque the government signed in offering to protect households and businesses from higher energy costs, aiming to make it more targeted and less expensive after April 2023. Prior to his statement, Britain’s public finances faced a hole in the medium term reported to be around £70bn per year. Taken together, the chancellor’s announcements may take that shortfall down to around £40bn. Mr Hunt warned of “difficult decisions” ahead, and of government departments needing to “redouble their efforts to find savings”.

Mr Hunt’s extraordinary elevation has been as striking as Ms Truss’s political implosion. After two unsuccessful tilts at the party leadership, until a fortnight ago his career in high office seemed to be over. He finished second, behind Boris Johnson, in the Conservative Party’s leadership contest in 2019. In the contest of 2022 he gathered the support of just 18 MPs. His background as a Remainer made him an unlikely fit for a party that has become more dogmatic since the Brexit referendum of 2016. Now he is the prime minister in all but name. Yet even he is not really in charge. For the foreseeable future, Britain’s fiscal policy will be dictated not by what its politicians want, but by what the bond markets will bear.