Trussonomics Gets Stunning Coup De Grâce From Hunt

It’s over. Trussonomics is dead. It lasted less than a month.

On Monday, one business day after the sacking of his predecessor, Jeremy Hunt reversed nearly all of the tax measures announced by the Liz Truss government on September 23. The humiliating U-turn will go down as one of the most remarkable fiscal boondoggles in the modern history of advanced economies. Truss’s mini-budget will live in infamy.

Over the weekend, following Truss’s begrudging abandonment of a freeze on corporate taxes, Hunt refused to rule out additional amendments to the prime minister’s growth plan. The writing was on the wall. He was acutely aware that markets would attempt to force the issue.

Hunt was unequivocal on Monday. “We will reverse almost all the tax measures,” he said, in a stunning statement. The planned cut to the basic rate, which was brought forward by a full year (to April 2023) in the Kwarteng budget, was scrapped. At 19%, it would’ve been the lowest in the modern history of the nation’s income tax system. The last cut was during the financial crisis.

In addition to canceling the accelerated cut, Hunt scrapped Rishi Sunak’s original plan for a cut in 2024. As the BBC noted, “the prime minister, who promised to cut taxes by more than her rival over the summer, is now keeping them higher than he planned.” The basic rate will stay where it is “indefinitely” until economic circumstances change, Hunt said.

Although the stamp tax collection measures and a cut to National Insurance will remain, everything else is gone. “We will no longer be proceeding with the cuts to dividend tax rates, the reversal of off-payroll working reforms, the new VAT-free shopping scheme for non-UK visitors or the freeze on alcohol duty rates,” Hunt told the world.

All in all, around £32 billion of the unfunded £45 billion in tax cuts was reversed in just over three weeks. That counts the decision not to abolish the top tax rate, the decision to move ahead with higher corporate taxes and the abandonment of the basic rate cut.

An economics reporter for the BBC was at a loss for words. “We may need new terminology,” he said. “‘U-turn’ suggests a controlled maneuver. This is like a plane trying to do the jet engine equivalent of a handbrake turn.”

“A central responsibility for any government is to do what’s necessary for economic stability,” Hunt said Monday, in his short address. “No government can control markets, but every government can give certainty about the sustainability of public finances.”

Hunt’s extraordinary repudiation of Truss’s growth plan came after an epic market revolt and an attendant crisis in UK bonds, which forced the Bank of England to intervene to prevent the nation’s pension funds from collapsing under the weight of margin calls. Last week, Andrew Bailey effectively drew a line in the sand, reiterating the BoE’s intention to end an emergency backstop for gilts as scheduled, leaving Truss’s fiscal agenda (and indeed her stint as prime minister) at the mercy of unforgiving markets.

Headed into the new week, it was obvious that the decision to oust Kwasi Kwarteng and Truss’s relent on corporate taxes were insufficient to placate markets. With forced selling from pensions likely ongoing, the prospect of a renewed selloff in gilts was simply too daunting. Hunt had to do something dramatic. So, he did.

He repeatedly referenced markets on Monday. Indeed, he cited frayed market nerves not just as the rationale for effectively bringing forward the medium-term fiscal plan, but also for his televised statement, which was released ahead of a more detailed explanation to parliament: “Because these issues are market sensitive, I’ve agreed with the speaker to give an early brief summary of the changes, which are all designed to provide confidence and stability.”

The most striking soundbite of all came when Hunt told the nation that,

It is a deeply held conservative value that people should keep more of the money they earn. But at a time when markets are rightly demanding commitment to sustainable public finances, it is not right to borrow to fund this tax cut.

He was referring specifically to the scrapped basic rate cut, but that passage from Hunt’s statement served as a summary of the government’s newfound respect for fiscal rectitude as demanded by the bond vigilantes, whose victory is now well and truly complete.

Invariably, Truss’s supporters (all four or five of them) will blame the BoE for not agreeing to accommodate fiscal largesse, but I’d reiterate that no matter what you might read elsewhere, the fact (the cold, hard, inescapable fact) is that the BoE’s plans to trim its gilt holdings were well telegraphed and known to markets and the government for months. The idea that BoE QT was somehow a devious means of undermining the Truss growth plan is a lie. Not an alternative perspective on recent events. But an outright lie. Do yourself a favor and keep that in mind if you happen to stumble across or otherwise peruse competing accounts of this fiasco.

As for the energy price guarantee, Hunt called it a “landmark” policy “supporting millions of people through a difficult winter.” He kept it. Temporarily. “The support we’re providing between now and April of next year will not change,” he said. Then, he addressed one of the biggest elephants in a room full of huge pachyderms. Beyond April, Hunt said, “it would not be responsible to continue exposing public finances to unlimited volatility in international gas prices.” The energy price cap represented an uncapped liability because Truss has no control over wholesale gas costs. Hunt isn’t having it. Not in perpetuity anyway. Treasury will review the situation from April, and craft a new approach “that will cost the taxpayer significantly less.”

Kindly allow me tell you what’s likely to happen next. Markets will be pleased with Hunt’s announcement, but not with the ongoing presence of the now defunct growth plan’s mastermind at No. 10. Truss is now a prime minister without the support of markets, without much support from her party and without a policy platform. That’s not tenable. I’d expect her resignation within weeks. “What is the point of Liz Truss?” one former cabinet minister wondered, in remarks to the BBC Monday. “There is literally no point.”

As for the ongoing LDI “clean up,” that’s anyone’s guess. It’s possible that waves of forced selling will continue, and the impact on markets will generally be indistinguishable from vigilante justice, as least as it relates to gilts.