Reality of the facts, confirmed for the umpteenth time by Liz Truss’s United Kingdom, where all the spotlight is on the speech of the new Minister of Finance, Chancellor of the Exchequer Jeremy Hunt: the markets mercilessly reject the announcements of the maxi tax cuts, while toasting to fiscal discipline. Taken over from Quasi Quarteng – fired by Prime Minister Liz Truss last Friday after the embarrassing tax cut plan announced weeks ago – Jeremy Hunt opted for an abrupt announcement of an equally drastic measure: that time to virtually reset almost all the measures that the government of Liz Truss he had flaunted with great pride in the days following his inauguration.
Debt pays off, and when the markets sniff out measures that they risk creating more deficits and debt in an unsustainable waythey do not take long to punish those directly involved.
Hunt has made known his intention to withdraw almost all those measures: to be saved, will be the planned abolition of thehealth and social care tax and the modification of the stamp duty.
Ma many promises spend and go by the Truss governmentannounced three weeks ago, have been canceled.
The proposal for cut the lower rate of income tax that, according to the initial plans of Truss and the now former minister Kwarteng, it would be lowered from 20% to 19% from April 2023; just as the proposal to cut was canceled taxes on dividends.
Among other measures, also withdrawn that aimed at introducing a scheme to allow non-British tourists to shop tax free, and the other that aimed to remove the ceiling set in 2008 on bonuses for bankers and top managers.
Furthermore, we will no longer proceed the freezing of excise duties on alcohol, another promise that the Truss government would have liked to realize for a year, starting from February 1, 2023. But no. In recent weeks, there have been several parallels between the government of Liz Truss and the nascent one of Giorgia Meloni.
The comparison was accentuated especially after the alerts launched by the so-called guardians of the spread: the rating agencies, which certainly did not spare various warnings and warnings to the United Kingdom and Italy after the political elections. Always flaunting the usual diktat: that, in fact, of fiscal discipline.
The reaction of the markets to the virtuous speech, as it could be defined, by Jeremy Hunt was immediate:
the pound toasted the announcement, rocketing more than 1% against the dollar to jump to around $ 1.1288.
Unleashed buy on UK government bonds – Gilts – they slid the 30-year rates by almost 40 basis points: one of the most sustained thuds in UK history.
Jeremy Hunt also announced another turnaround: that on measures to support families and businesses facing the drama of expensive energy and expensive bills. Those aid measures, the new Finance Minister specified, will last for just six months, and not two years, as Kwarteng had announced. Hunt explained the latter decision with the principle that it would not be responsible for the government to expose public finances to the unlimited volatility of gas prices.
The abolition of all these measures, the new Chancellor of the UK Exchequer specified, combined with the already announced cancellation of the pro-rich measure – the initial one that had caused scandal, that is the abolition of the higher rate of income tax from 45% to 40% for those earning more than £ 150,000 – it will save the government £ 32 billion a year.
The minister began his speech by stating that it is the responsibility of each government to do whatever is necessary to ensure economic stability.
And there has certainly been no economic and financial stability in the United Kingdom over the last three hectic weeks, and precisely because of the shock announcement on the scissor cut to the most massive taxes of recent decades in the UK, who had unleashed the wrath of the UK trade unions: “A gift to the rich and large companies”, they thundered. The effect of Kwasi Kwarteng’s announcement, on the financial markets, and not just the UK, was immediate:
il mini-budget it had promptly caused the sterling and the Gilts to collapse.
Massive stampede of global investors from UK bonds, confirming how the anxiety of running a deficit and debt translates into a collapse in confidence in government bonds, wrecking its value, in the face of a hike in rates (which makes interest expenses more onerous for the reference government).
The euro also fell, moving further away from the dollar parity.
The interest rate panic had also infected Wall Street and the Treasuries: a real disaster, which the central bank of the United Kingdom had managed to buffer after a few days with market intervention, thus stopping the gilt bond slaughter .
But not all the work could fall on the shoulders of the central bank: as a result, in the following days the government of Liz Truss was forced to back down, finally asking for Kwasi Kwarteng’s head, to which, in the end, was given an embarrassing rebuff.
On the other hand, it’s all a question of trust, as he commented to the Guardian Dermot O’Leary, chief economist at Goodbody investment bank:
“The Chancellor’s emergency announcement should help restore that confidence in the (UK) markets so much needed, after the extraordinary volatility of the past two weeks. These measures have been designed to face any turbulence that may arise on the markets and, also, to emphasize credibility towards the economic competence and fiscal responsibility of the government “.
O’Leary pointed out that “We had already seen (before Jeremy Hunt’s speech) the strengthening of the pound and the rise of the London stock exchange, as the markets had anticipated further reversals” compared to Liz Truss’s original plan ”.
The comment of Ryan Shorthouse, head of conservative think tank Bright Blue who, according to what was disclosed by the Guardian, recalled that “Fiscal discipline is no longer secondary to growth”. Adding that “The conservative government is distancing itself from the brief flirtation with the principles of Keynes”.
And by ruling that “Trussonomics has been suppressed. Cameronism is back ”.