The Brief: Newly appointed UK chancellor, Jeremy Hunt, announced the scrapping of Kwasi Kwarteng’s tax cuts to salvage the financial markets that have been battered these past weeks. In a tweet, Liz Truss stated, “The British people rightly want stability, which is why we are addressing the serious challenges we face in worsening economic conditions.” The reversals cover cuts in the lowest rate of income tax to 19% from 20%, cuts to dividend tax rates, off-payroll working reforms, tax-free shopping for tourists, and the freeze on alcohol duty rates, as mentioned in Hunt's speech. The energy bill freeze, on the other hand, will only run until April instead of the previous two-year plan.
Why It Matters: The markets reacted positively upon the confirmation by Hunt. The yield on 10-year gilts dropped 36 basis points to 3.97% while sterling moved 1.1% upward at $1.1293.
Finanze® Foresights: Backtracking on some of Truss’ controversial fiscal measures since she stepped into office is a significant move towards restoring the government’s credibility and the markets’ sustainability. Hunt knows that the market reacts very swiftly, so he decided to announce the scrapping in the morning before going into the details in the afternoon to reassure markets that the government stays true to its commitment to fix the economy. However, today’s market reaction was led by the fall in yields, which is inversely related to bond prices. But this will be only temporary as the government still has to prove that it can align with the Bank of England (BoE) if it wants to prevent further panic in the markets. Gilt prices remain high and still have a long way to go before diving back to the level before Truss was formally appointed as PM in early September.
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