The Daily Telegraph

Hunt saves £20bn by soothing gilt markets

Record fall in borrowing costs for a single day as Chancellor raises hopes of return to fiscal discipline

- By Tim Wallace

JEREMY HUNT has saved Britain £20bn on interest payments after his decision to tear up the Prime Minister’s tax cuts triggered a record drop in borrowing costs.

The pound jumped and the cost of government debt fell sharply as the Chancellor abandoned the vast majority of Liz Truss’s mini-budget amid rising hopes of a return to fiscal discipline.

It sent the yield, or interest rate, on 10-year gilts tumbling by 0.41 percentage points to below 4pc, while the yield on 30-year gilts dropped 0.48 points to 4.37pc, both the biggest ever daily falls.

Meanwhile sterling rose more than 2pc to above $1.14.

If sustained, the lower borrowing costs will cut the country’s interest bill by £20bn over the next five years. Debt interest will be £7bn lower in 2026 alone, according to the Institute for Fiscal Studies (IFS).

Combined with the £32bn that Mr Hunt has saved the Treasury by abandoning measures such as a 1p cut to the base rate of income tax, it means the Chancellor has now filled around two thirds of the £60bn black hole in the country’s finances.

However, the tax burden will be at its highest level since 1950 and Paul Johnson, director of the IFS, warned that more needs to be done to restore a lasting sense of stability. “Fiscal credibilit­y is hard won but easily lost. Today’s announceme­nts won’t be enough, by themselves, to plug the gap in the Government’s fiscal plans,” he said.

“Nor will they be enough to undo the damage caused by the debacle of the past few weeks. But they are big, welcome, clear steps in the right direction.”

In a boost for mortgage holders, traders now expect the Bank of England to raise its headline interest rate to a peak of no more than 5.25pc next year, down from the 6.25pc which was anticipate­d.

However, the U-turns represent the biggest single set of tax rises since 1993 according to Torsten Bell at the Resolution Foundation, sending the tax burden to 36pc of GDP, its highest sustained level in more than 70 years. It almost totally reverses the biggest tax cut since 1972 announced in the mini-budget little three weeks earlier by Kwasi Kwarteng, Mr Hunt’s predecesso­r.

Mr Bell said: “The speed of this turnaround is stark. This is now very clearly a tax raising parliament, with the tax take set to reach highs not sustained since 1950.”

The Resolution Foundation estimates the average household will be £1,000 per year worse off in 2025-26 as a result of the tax and benefit changes announced in this parliament, with the freezing of the income tax thresholds representi­ng the biggest stealth raid.

The Office for Budget Responsibi­lity (OBR) is preparing to give its verdict at the end of the month on the plans and the outlook for the economy, with its forecast likely to be regarded as crucial.

Martin Beck, chief economic advisor to the EY Item Club, said the critical risk is that the OBR delivers a weak forecast for growth which means it has to predict disappoint­ing tax receipts, putting more pressure on the Government.

He said: “The risk is that the OBR will produce a very gloomy forecast for GDP growth and borrowing, based on uncertaint­y ... The markets will take it as gospel. The Government will be compelled to cut more, to raise taxes more, to try to get the deficit down and you end up weakening the economy further.”

Carl Emmerson, of the IFS, said the Chancellor faces a trade-off as his tax rises are harmful to growth. However, in soothing financial markets he will soften the blow higher borrowing costs had threatened to deal to the economy.

When it comes to further action to reduce borrowing, the Chancellor acknowledg­ed he faces “decisions of eye-watering difficulty”.

Mr Emmerson said Mr Hunt has to decide whether to make clear spending cuts now or vague promises for later.

He said: “In an uncertain world you might think there is some justificat­ion to saying, let’s wait and see. The problem is, if the markets are really focused on it, they might ask if that is really credible – who is going to be prime minister or chancellor in 2025? To what extent does he go for [spending cuts] in the next three years, where he can be detailed and firm but it is potentiall­y painful – or for the later years?”

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