Emergency budget announcement: expert reaction to new UK chancellor’s attempt to calm financial markets

The Conversation

Newly installed UK chancellor, Jeremy Hunt, has unveiled a raft of changes to Kwasi Kwarteng’s September 23 mini-budget, which essentially amounted to a rollback on most of its headline points.

The September mini-budget, which included £45 billion in unfunded tax cuts, created significant volatility in financial markets in the weeks after it was announced. The resulting impact on the cost of borrowing for the UK also filtered through to consumer mortgage rates and pensions.

Hunt has indefinitely postponed a planned cut to the basic rate of income tax and rolled back most of the other taxation plans from the government’s growth plan. Only the repeal of the National Insurance increase and the cut to stamp duty remains because they are already in the process of being signed off by parliament.

We will be updating this article with more expert insight about the impact of the announcement and what else the government should do to restore the UK’s economic reputation.

Financial market reaction

Steve Schifferes, Honorary Research Fellow, City Political Economy Research Centre, City, University of London

The government appears to have stabilised the financial markets with an emergency statement by the new chancellor, Jeremy Hunt. The statement was brought forward by two weeks, in an unprecedented move designed to calm recent financial market turbulence in the weeks following ex-chancellor Kwasi Kwarteng’s September 23 mini-budget.

The interest rate on a key measure of government debt, 30-year gilts, had been rising sharply over the weekend to 4.8%, but fell back to 4.4% immediately ahead of Hunt’s statement. Such drops are uncommon in this market, which has now stablised. The cost of government borrowing has still not recovered to the 3.5% level of before the mini-budget, however. Similarly, the pound strengthened from $1.11 to $1.13, but remains 18% below its level one year ago.

In addition to scrapping £32 billion of the £45 billion in unfunded tax cuts announced in the mini-budget, Hunt also announced there would be further public spending cuts. Most importantly, however, the government has abandoned its commitment to fund an energy price cap – expected to cost £60 billion this year alone – beyond April 2023.

It will replace the scheme with a more targeted measure to be developed by the Treasury in the meantime. This will substantially reduce the deficit for the next two financial years – the original time period for the plan, announced in September. This will not have a direct impact on the Office of Budget Responsibility’s five-year deficit forecast, which discounts temporary measures, but it will lower the amount of debt interest payments the government will have to make.

But there are limits to how far his announcement can completely reassure the markets. Investors are likely to continue to add a “risk premium” when it comes to the UK, which means the markets will still demand higher interest rates when lending to the UK government than before the mini-budget. Among other issues, concerns remain over political instability, with the fate of the prime minister Liz Truss, in particular, remaining unclear.

Additionally, the increased likelihood of a UK recession (which would reduce government revenues) has increased. This is partly because the Bank of England is now expected to raise interest rates more sharply than previously planned, and also because the global economy – especially in the US, Europe and China – is slowing down faster than anticipated.

The next test for the government will be the Office for Budget Responsibility forecast and full budget statement on October 31. Despite buying some time, the fate of this government is still in the hands of the markets.

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Business certainty

Steven McCabe, Associate Professor, Institute for Design, Economic Acceleration & Sustainability (IDEAS), Birmingham City University

Businesses tend to be successful when there’s confidence that the government has a coherent plan for the economy and is consistent in its implementation. The past three weeks have been anything but coherent or consistent. Hunt’s five-minute emergency statement consigns Trussonomics to the bin and acts as a warning to future governments about ignoring the markets.

The reversal of Kwarteng’s unfunded tax cuts, as well as the review of the energy support scheme – expected to cost more than £100 billion before it was cut from two years to six months – means public finances are on a surer footing. Creating a sense of stability and showing there is a grownup in charge will restore confidence among the international financial markets. This will be excellent news for businesses which, although they will be paying more corporation tax after last week’s U-turn, can at least make investment decisions with reasonable certainty.

Nonetheless, problems remain. Inflation is still very high, which may require the base rate to remain elevated for months. The pound, which has risen today after Hunt’s announcement, is still lower than when Kwarteng became chancellor in early September. Many businesses are in a precarious state and beset by a range of challenges including skill shortages and the prospect of higher energy after April.

Hospitality businesses – already being squeezed by rising energy costs – will not be helped by the scrapping of the alcohol freeze. Equally, Hunt’s reversal of plans for tax-free shopping for tourists will be a kick in the teeth for those hoping to see the UK attract more overseas visitors. The retail sector is also bracing itself for tough times as people in the UK become collectively poorer and cut back on discretionary spending. More intervention may be essential to stem the rate of business closures this winter.

Check back for further expert insight over the course of today.

The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.