- Fiscal statement brought forward from 31 October to today.
- New Chancellor Jeremy Hunt expected to roll back on array of tax cuts
- Pound rises as speculation swirls about Liz Truss’ future
- Bank of England says there is a ‘meeting of minds’ with Jeremy Hunt
- UK economic growth downgraded, with contraction of 1% expected next year
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
‘’New Chancellor Jeremy Hunt has the air of a troubleshooting teacher brought in to turn around a failing school and faces his first big presentation test today with an emergency budget plan wheeled out to try and calm financial markets. This is all part of his charm offensive to instil confidence in the government’s ability to be fiscally responsible, but behind him unruly pupils are still scheming to oust the beleaguered head.
The bringing forward of the fiscal statement is in itself another U-turn, given that the government had been sticking to Halloween date for its release, even on Friday. But worries that the bond markets in particular will take fright again has prompted fresh urgency for damage limitation so a roll-back of planned tax cuts is now expected. It looks highly likely that the 1p cut in the base rate of income tax set to be postponed, we could see changes to the new VAT-free shopping scheme for tourists, and possibly a reversal of plans to relax the way tax is collected from self-employed people. We could even see a rise in VAT. But filling the black holes in the government’s finances will be far from easy so highly unpalatable spending cuts across government departments are also expected. Jeremy Hunt had already been setting the scene for this bonfire of tax cuts over the weekend. Those pledges and speculation that Liz Truss’ days are numbered are likely to have been behind sterling’s rise of 0.5% during trade in Asia, which saw it nudge back above $1.12. Since the emergency budget statement was announced, it’s gained further ground. But sterling is still weaker than before Kwasi Kwarteng was ruthlessly axed, with the chief architect of the disastrous mini-budget still, for now, in place.
More attempts at reassurance have come from the Bank of England, with the Governor Bailey saying he’d had a ‘meeting of minds’ with the new Chancellor, indicating Jeremy Hunt accepted market mayhem had been sharply exacerbated by the government’s policies and that fresh action and not just words were needed to help turn the tide on the volatility. Today’s developments may hold off a fresh assault on government borrowing costs by the bond vigilantes standing by in the UK gilt market, but it could only be a temporary reprieve. Trussenomics may have been ripped up and fed to the shredder but the author of the big gamble remains in power, and has the final say on the direction of travel. Investors are craving more stability but given the flip flopping we’ve had so far in her super-short tenure, economic policy uncertainty remains and that’s likely to be the key driver in the bond markets and on foreign exchange desks.
Amid the turmoil UK economic prospects have dived again according to the latest assessment from Goldman Sachs, which is now forecasting a 1% contraction next year, worse that it’s previous estimate of -0.4%. Far from bringing a burst of growth, the fireworks set off by the mini-budget have caused the fires of inflation to burn more intensely, partly due to the weaker pound, and borrowing costs for companies, homeowners and consumers to rise sharply.
The mighty dollar shows little sign of losing much muscle with interest rate rise expectations in the US remaining high, with the Federal Reserve stepping its foot on the pedal of hikes more determindly than other central banks. There appears to be little appetite for any kind of multi-national action to weaken the greenback, which was undertaken back in 1985 under the Plaza Accord agreement, with US Treasury Secretary Janet Yellen saying a market-determined value of the dollar is still in America’s best interests. As a result we should expect more rate rises to come as countries try and play catch up and mitigate the effects of the super-strong dollar, despite risks increasing of tipping into recession.’’
