New UK Chancellor Announced More Policy Reversals, After a Chaotic Week

Tumultuous Weeks

Towards the end of the previous month, the new UK government under PM Liz Truss, had announced a new Growth Plan that included large tax cuts, drawing heavy criticism - from the International Monetary Fund (IMF) included.

It also raised concerns over its impact on the UK debt, which were aggravated by the fact that the spending package was not accompanied by an assessment from Office for Budget Responsibility (OBR).

Markets reacted negatively to the fiscal package, with a bond market sell-off and GBP/USD hitting all-time lows, leading the Bank of England to an emergency intervention plan to avoid the potential collapse of pension funds.

Policy Reversal

The market rout forced the government in a series of U-turns, initially scrapping the abolition of the 45% top income tax rate and then ditching the cancelation of the corporate tax cut increase that had been planned by the previous administration.

In the meantime, then Chancellor Kwarteng had expedited by almost a month the delivery of the Medium-Term Fiscal Plan, in an attempt to calm markets. He had announced that this would take place on October 31st and would come along with a forecast from the Office for Budget Responsibility (OBR).

Mr Kwarteng however was fired on Friday and replaced by Mr Jeremy Hunt, who today, brought forward, measures from that plan that will support fiscal sustainability. Mr Hunt reversed almost all of the tax measures of the Growth Plan, canceling among other things the reduction of the basic income tax rate. ^[1]

Taken together, these changes are estimated to be worth around £32 billion a year. The Chancellor maintained the landmark energy price guarantee policy until April next year, but announced a review into how to support consumers after that date.

The new Chancellor will speak later in the UK Parliament, while the full Medium-Term Fiscal Plan along with the OBR forecast will be delivered as scheduled, at the end of the month.

Bumpy Ride

PM Truss has bought some time with replacement of the finance minister who delivered the spending measures that rattled markets, but she probably has tough road ahead. Her authority has been severely damaged and there are calls for elections from the opposition and her own part.

Today's announcement by Mr Hunt, I believe further undermines her leadership and it remains to be seen if he will follow the PM moving forward or he will try to push his own agenda.

Although the reversal may help provide some stability in the markets, uncertainty remains high at this stage, politically and economically.