Britannia Un-Trussed but market still betting on steep interest rates rises

ITV Business editor Joel Hills explains what the U-turn could mean for the economy

It’s official: Trussonomics has been routed.

The new chancellor, Jeremy Hunt, has junked £32 billion of the £45 billion of (unfunded) givewaways announced by his predecessor, Kwasi Kwarteng, less than four weeks ago.

The Truss/Kwarteng Growth Plan has been hacked back to a size it’s hoped investors will find easier to swallow.

The cut to dividend tax rates has gone. So too has the reversal of off-payroll working reforms; VAT-free shopping for tourists visiting the UK; the freeze on alcohol duty and the cut to the basic rate of income tax.

All of them abandoned - along with the pledge on corporation tax and the income tax cut for high earners - in an attempt to restore order in the bond markets.

And while the Energy Price Guarantee will exist in its current form this winter, the generous but very expensive (around £60 billion per year) subsidy for households and businesses will be “reviewed” in the spring.

The chancellor says the scale of support next year will depend on the path of wholesale prices and will “cost the taxpayer significantly less than planned”.

The price of UK government bonds rallied this morning, along with the pound. The yield - the effective interest rate the government pays to borrow money - on the 30-year gilt had fallen by 40 basis points to 4.35% by midday. 

The chancellor has continued to stress stability in order to reassure markets, ITV News Economics Editor Joel Hills reports

But not all of the damage of Liz Truss’s mini-budget has been undone.

Credibility is lost quickly and takes time to win back. And the government still plans a modest fiscal stimulus (the cuts to National Insurance and Stamp Duty have been retained) at a time when the Bank of England is busy trying to cool demand.

Investors are betting that interest rates will still have to rise steeply to contain stubbornly high inflation.

Bank Rate - currently 2.25% - is now expected to peak above 5% next May. The thinking before the Growth Plan was published was 4.25%.

Households and businesses still face a huge increase in their borrowing costs. Some of that is down to global forces but much of it is a result of government policy.

“You’ve got an extra percentage point now on the implied path of Bank Rate, compared with before the mini-budget,” says Ross Walker, Chief UK Economist at NatWest Markets.

“At least half of that and probably three-quarters would be a reflection of the impact of the fiscal stimulus”.

The action Jeremy Hunt took today was radical but there’s still a sizable gap between what the government is set to spend and the tax revenues it is expected to collect.

A week ago, The Institute for Fiscal Studies said the government would need to find around £60 billion of savings if it is to ensure that national debt is falling as a share of national income by 2026/27. Today’s £32 billion of tax rises won’t be enough to get there.

The chancellor admits as much, warning “difficult decisions” lie ahead. On October 31st we are being told to expect taxes to rise further and public spending to be cut.

The last four weeks have been shambolic but Jeremy Hunt will be hoping he has done enough this morning to restore order in financial markets and begin to process of rebuilding trust and confidence.

It’s still not clear what precisely upset investors in the first place.

The markets appeared to swallow the announcement of the Energy Price Guarantee, two weeks before mini budget. The policies in the Growth Plan had been widely trailed in advance.

Was it the scale of the implied borrowing that caused the run on UK government bonds? Was it the fact the chancellor made no attempt to demonstrate how his tax cuts would be paid for? Was it his promise, days later, of more tax cuts to come?

It could have been the refusal to allow the Office for Budget Responsibility to scrutinise the numbers that spooked investors.

It may have been staggering disharmony between the government and the Bank of England. Perhaps it was the sacking of the Permanent Secretary at the Treasury, more or less on Day 1.

Institutions like the OBR, the Bank of England and the civil service exist to keep governments honest and to help ensure policy-making is based on the best available evidence and the facts (in as much as they can be established) rather than ideology and instinct.

Liz Truss and Kwasi Kwarteng sought to publicly belittle all three institutions at various points over the summer. Investors appear to have taken the view that this is the stuff of failing states or populists who are trying to avoid scrutiny.

The government has paid a heavy price for such behaviour.

The prime minister and her first chancellor had an economic plan to “unchain” Britannia. They had faith in that plan but those who they were relying on to finance it did not.