Gilts and sterling extended their rally after new chancellor Jeremy Hunt confirmed plans to scrap the majority of the mini-budget, but traders warn that the relief may be short lived.
The UK political pivoting is “likely to reduce volatility in UK assets”, according to BlueBay Asset Management, which has cut its bet against gilts.
"Having thought Truss didn't go far enough on Friday, I think the steps announced by Hunt today were relatively credible. It is likely that this will reduce volatility in UK assets,” BlueBay's Mark Dowding told Bloomberg.
Former chancellor George Osborne has praised Hunt for taking "big bold steps".
Congrats to Jeremy Hunt for taking big bold steps to restore U.K. fiscal credibility - reversing most of mini budget & in effect raising income tax (from the 19p legislated by Johnson gov). Not sensible for PM to hide away - she needs to front this to have any chance of survival
— George Osborne (@George_Osborne) October 17, 2022
Ryan Shorthouse, chief executive of the centrist Conservative thinktank Bright Blue, said Trussonomics is dead.
“Fiscal discipline is no longer secondary to going for growth. The conservative government is turning away from its brief flirtation with Keynesianism.
“Balancing the books is back. Trussonomics suppressed. Cameronism returns.”
Rachael Griffin, tax and financial planning expert at Quilter, said the UK government is scrambling to show some semblance of credibility on tax and spending.
“The latest U-turn on a policy-that-never-was sees the reduction in income tax from 20% to 19% from April 2023 scrapped. The idea that you can cut taxes in search of growth is quickly being swept aside for austerity mark II.”
Matteo Cominetta, director economist at the Barings Investment Institute, however, pointed at the inconsistency of the UK government’s economic policies and asks who’s in charge.
Prime minister Truss moved rapidly to try and save her own premiership, dropping half of the fiscal package and substituting finance minister Kwasi Kwarteng with Jeremy Hunt. These U-turns are making markets sigh in relief, UK assets and the pound are recovering.
“The relief may be short lived though. The problem for PM Truss is that the policies included in the package were not Kwarteng’s policies, they were very much her own. She campaigned on a ticket of tax cuts, deregulation and fiscal profligacy to convince Conservative party members to elect her PM.
“Now that Jeremy Hunt is the new finance minister and announced policies pretty much opposite to those Truss based her premiership on, who is in charge? And what does she or he intend to do to weather the storm? And are conservatives MPs agreeing?
Hunt said he is reversing "almost all" of the tax cuts and measures announced in his predecessor's mini-budget announced last month.
The 1p cut to income tax will be delayed until the UK's financials improve, and the energy price guarantee will be universal until April, not for two years as originally planned, although he added the scheme will be more targeted from that point.
Mini-Budget is a lot more mini after this total gutting pic.twitter.com/vOVKqNcSAD
— Torsten Bell (@TorstenBell) October 17, 2022
Jason Hollands, managing director at Bestinvest also said that Trussonomics is no more, having been sacrificed to the markets.
“After recent U-turns over the abolition the 45p tax band and the halting corporation tax rises, the new chancellor Jeremy Hunt has this morning comprehensively ripped-up the prime minister’s fiscal policy in a concerted effort to placate the angry gods of the bond markets and restore the UK government’s battered credibility for fiscal discipline.”
Pensions provider Aegon asked for further clarity for pensioners amid a cost of living crisis.
“The latest announcement from the chancellor focussed on clarifying which of his predecessor’s mini-budget measures will no longer go ahead. But it’s not clear what other changes remain ‘on the table’.
“Hunt gave welcome focus to supporting the most vulnerable which includes many pensioners who get by on fixed incomes. They’ll be anxious to have certainty over whether their state pension will increase next April in line with inflation, with the key figure to be announced on Wednesday.
“While the government recommitted to the triple lock as recently as Thursday, so many U-turns have been made since then, that pensioners will be keeping everything crossed ahead of official confirmation. Providing this sooner rather than later will offer those pensioners the confidence and stability Hunt is keen to provide more widely,” Steven Cameron, pensions director at Aegon, said.
Kitty Ussher, chief economist at the Institute of Directors, said it is right for the government to focus on "restoring stability and confidence — without that growth is impossible".
"As our members have told us, the number one negative issue for their businesses at the moment is 'UK economic conditions'. Confidence is also extremely low, which in turn causes businesses to invest less, constraining growth further.
“Having said that, we are relieved that the employers’ national insurance reversal will proceed, since our members have consistently told us it only added to the supply-side pressures they were experiencing, which is why we had campaigned hard for it to be reversed over the last year.
"Given the difficult investment climate, it is also sensible to maintain the Annual Investment Allowance at the higher figure of £1m.”