- The UK’s finance minister Jeremy Hunt has backtracked on tax cuts announced just weeks ago.
- He put a hold on a cut in basic income tax, the latest government U-turn after the plan roiled markets.
- The pound topped $1.13, continuing its gains as investors took heart from the move to regain credibility.
The pound topped $1.13, adding to earlier gains against the dollar Monday, after the UK’s newly appointed finance minister Jeremy Hunt backtracked on huge tax cuts announced just weeks ago.
“We will reverse almost all the tax measures announced in the growth plan three weeks ago that have not started parliamentary legislation,” the chancellor said in an emergency statement.
The British pound was up 1% at $1.1320 after the news, having started rising earlier Monday on a Sunday Times report of a coming cut to income tax.
Hunt put an indefinite hold on plans to reduce the basic rate of income tax from 20% to 19%, and scaled back the support for households facing steep rises in energy bills.
He said the measures should raise an extra £32 billion ($36.1 billion) a year for the Treasury. “It is not right to borrow to fund this tax cut,” he said.
The finance minister’s statement is seen as a move to try to settle markets still jittery about the impact of the huge cuts on the economy. Investors were concerned about the lack of information on how the government would fund the fiscal policy.
“The message is very much one of calm and getting a steady hand back on the tiller,” Chris Beauchamp, IG’s chief market analyst, said.
“This greater degree of self-awareness, as well as Hunt’s reputation as being more of a ‘safe pair of hands’ certainly seems to have reassured everyone. For now, the market seems happy to give the new chancellor time and space to put the government’s house back in order,” he added.
The Treasury brought forward the announcement of the tax measures by two weeks to Monday, after a series of abrupt U-turns by the government on its mini-budget failed to calm worries about its economic credibility. The full plan is still scheduled to be published as planned on October 31.
Since Hunt took office on Friday, replacing Kwasi Kwarteng, who was sacked after markets were spooked by the tax plans he laid out a mini-budget earlier in October. The British pound crashed to an all-time low against the dollar, and yields on UK government bonds (gilts) shot up as the tax plan fueled fears of faster inflation, and spiraling government debt.
The turmoil prompted Nobel laureate Paul Krugman to say the UK markets were “behaving like those of a developing country.”
That and political pressure on Prime Minister Liz Truss led to a series of U-turns on the tax plans in recent days. These include scrapping a planned hike in corporation tax to 25% from 19%, and back-pedaling on the plan to cut the highest income tax rate of 45%.
The pound began its rise earlier Monday after The Sunday Times reported Hunt was expected to delay a planned cut to the basic rate of income tax by a year, citing unidentified sources.
The report also said the UK’s Office for Budget Responsibility — a public body that analyses public finances —is forecasting a shortfall of up to £72 billion in the public coffers by 2027 to 2028.
The OBR did not respond to an Insider request for comment.
The UK economy is on the cusp of a recession, after a surprise 0.3% fall in GDP in August. The economy also contracted 0.3% in the three months to August — its first decline since early 2021 amid the COVID-19 pandemic. A recession is commonly defined as two consecutive quarters of GDP declines.
