HUNT SHREDS TRUSSONOMICS
New Chancellor axes swathes of PM’s economic programme by scrapping her tax cuts and clawing back £32bn for the Treasury
THE Chancellor rolled back swathes of Liz Truss’s economic programme yesterday in one of the biggest U-turns in British political history.
In a devastating five-minute speech, Jeremy Hunt scrapped almost all the tax cuts announced in last month’s mini-Budget and watered down the energy price guarantee.
Seven tax giveaways were ditched, clawing back £32billion for the Treasury, including a shock move to scrap indefinitely a planned 1p cut to the basic rate of income tax.
Opponents labelled the statement a ‘gutting of Trussonomics’ and accused the Prime Minister of being ‘in office, but not in power’.
Mr Hunt hopes his willingness to ditch Miss Truss’s flagship policies will persuade markets he is committed to fiscal responsibility.
But the drastic U-turns mean taxes will remain at a 70-year high and left the Prime Minister’s credibility in shreds.
A typical household will now be around £1,000 worse off due to the permanent tax and benefit changes announced this parliament, according to research by the Resolution Foundation think-tank.
Yesterday the Chancellor told MPs that he would reverse around three quarters of what were £43billion of tax cuts.
Mr Hunt had already reinstated plans to raise the tax on company profits to 25 per cent, raising £18.7billion, while keeping the 45p tax rate for top earners will raise £2.1billion.
In addition, measures to reform IR35 rules for self-employed workers – that would have made it easier to hire contractors – and the return of tax-free shopping for foreign tourists were scrapped, saving around £2billion apiece.
A freeze on alcohol duties was also ditched, costing drinkers £600million a year, while a 1.25 percentage point increase in dividend taxation will be kept, saving the Exchequer another £900million.
The markets responded positively, with the benchmark 10-year gilt yield falling below 4 per cent, while the pound rose against the dollar to $1.14.
Yesterday rebel Tory plotters continued to circle as opposition MPs jeered she was ‘in office but not in power’.
The move on income tax broke a promise made by Miss Truss at the Tory leadership hustings in August when she told jubilant party members: ‘Yes. No new taxes.’
Income tax will now be higher from April 2024 than it would have been under Boris Johnson who, with Rishi Sunak as chancellor, had pledged to reduce the basic rate to
19p in time for the election.
Yesterday Mr Hunt yesterday scrapped the 1p cut indefinitely, saving £5.9billion. He said: ‘It is a deeply-held Conservative value – a value that I share – that people should keep more of the money that they earn.
‘But at a time when markets are rightly demanding commitments to sustainable public finances, it is not right to borrow to fund this tax cut.’ The basic rate of income tax, paid on earnings between £12,570 and £50,270, will remain at 20 per cent ‘indefinitely, until economic circumstances allow for it to be cut’, Mr Hunt added.
Mel Stride, the Tory chairman of the MPs’ Treasury committee, labelled the U-turn as a ‘positive move’. He said: ‘The Chancellor gets what needs to be done and is acting fast.’
But there was opposition from Truss supporters in the House of Commons. Sir Edward Leigh demanded that taxes fall before the next election and asked: ‘What is our vision?’
He said: ‘Of course we accept the shortcomings of the mini-Budget, but does he accept we can’t just slide into a sort of second-rate economy, going in the direction of France, with a bloated public sector, the highest taxes for 70 years, gross inefficiencies?’
Mr Hunt replied: ‘This compassionate Conservative government was able to step in with massive help ... with the furlough scheme, with the energy price guarantee because we took difficult decisions on the economy in the years that preceded it.’
Rachel Reeves, Labour’s Shadow Chancellor, told the House of Commons: ‘ The people who caused the chaos cannot be the people to fix the chaos. They are out of ideas, out of touch and out of time’, adding: ‘The Prime Minister is barely in office, and she is certainly not in power.’
Mr Hunt replied: ‘Behind the rhetoric, I don’t think she disagreed with any of the decisions that I announced to parliament, and that is important for the country and markets to know.’
The measures were brought forward from October 31 due to dire forecasts from the independent budget watchdog, the Office of Budget Responsibility, which suggested there would be a £70billion black hole in the nation’s finances.
The Treasury hopes it will avoid the deepest cuts to public spending – although will still need to find around £38billion in savings by 2026/27.
Mr Hunt signalled a return to ‘ austerity- lite’ to balance the books, saying ‘all departments will need to redouble their efforts to find savings, and some areas of spending will need to be cut’.
Miss Truss’s pledge to raise defence spending to 3 per cent of GDP was thought to be at risk, and Mr Hunt also refused to make a commitment on the pensions triple lock.
The U-turns will help to shield mortgage holders by reducing pressure on the Bank of England to implement a full 1 per cent hike to interest rates on November 3, which would take rates to 3.25 per cent.
Traders were this afternoon betting that the base rate will peak at just over 5 per cent next year, down from an estimate of at least 6 per cent after the mini-Budget.
Mark Littlewood, director general at the Institute of Economic Affairs, a free market think-tank close to Miss Truss, said: ‘There is a clear need to improve the Government’s fiscal position to calm the gilt markets.
‘It’s disappointing, however, that so much of the heavy lifting will come from higher taxes.
‘The risk of raising taxes is that they put Britain back on the path towards a high-tax, low-growth economy – that makes it even more important to get on with regulatory reform.’
The Government is still planning to go ahead with plans to deregulate business and planning, boost domestic energy supply and expand digital infrastructure.
Torsten Bell, chief executive of the Resolution Foundation, said: ‘Trussonomics has been entirely gutted. The scale of the turnaround today is staggering.
‘The goal is to reduce the pressure on the Bank of England to raise interest rates and the Treasury to cut public spending. Forget lower taxes to boost growth. This is a tax-rising parliament.’
‘The turnaround is staggering’
‘Out of ideas and out of touch’