LONDON – Britain’s new finance minister Jeremy Hunt faces an early test of his attempt to stem the crisis of confidence in Prime Minister Liz Truss on Monday when the bond market delivers its verdict on his weekend overhaul of her economic program.
Truss fired her friend Kwasi Kwarteng and named Hunt as her new chancellor of the exchequer on Friday in the hope of recovering some economic policy credibility and staying in Downing Street, little more than month after she moved in.
But British bond prices immediately renewed their sharp sell-off in the final hours of trading last week as investors decided that Truss’s decision to allow a rise in tax on company profits – reversing her promise to freeze them – was not enough.
Hunt, a former foreign and health minister, said on Saturday some taxes will go up, spending will rise less than previously planned and that he hoped investors would take note of his changes that represented a near total U-turn in fiscal policy.
“No government can control the markets. No chancellor should seek to do that,” Hunt told BBC television in an interview broadcast on Sunday.
“There is one thing we can do and that’s what I’m going to do, which is to show the markets, the world, indeed people watching at home, that we can properly account for every penny of our tax and spending plans.”
The Sunday Times reported Hunt would delay by a year a cut to income tax for workers which Truss had promised for April.
Trading in Britain’s battered government bonds resumes at 8am (0700 GMT) on Monday, the first day that trading in long-dated debt will not be supported by emergency Bank of England bond-buying which began on Sept. 28 and expired on Friday.
“Meeting of minds”
Any bond market respite is likely to prove fragile before Hunt announces a new budget plan on Oct. 31.
The budget will aim to narrow a hole in public finances that the Sunday Times reported is as big as 72 billion pounds ($80.4 billion), including the 45 billion pounds of tax cuts originally planned by Truss, only about 20 billion pounds of which have so far been reversed.
BoE Governor Andrew Bailey gave Hunt a vote of confidence on Saturday, saying they had an “immediate meeting of minds” on the need to fix the public finances.
But Bailey also said interest rates would probably have to go up sharply next month, even with the economy likely to go into a recession soon.
Goldman Sachs said on Sunday it expected Britain’s economy to shrink by 1 percent in 2023, a more severe contraction than its previous forecast of a 0.4- percent shrinkage, as Truss’s tax cuts were reversed.
Former finance minister George Osborne, who oversaw a tight squeeze on spending for six years until the 2016 Brexit vote, said the last six years of political upheaval in Britain were taking its toll on the economy.
“That is how the rest of the world looks at it,” he told Channel 4 television. “You have this unreality in the British political system – they don’t want to address the fundamental deterioration in the UK’s economic position in the world.”
($1 = 0.8949 pounds)