As one analyst put it “Britain’s budget bomb is still ticking despite tax U-turn”.
A crazy 10 days for the UK was capped off yesterday morning with a tweet from chancellor of the exchequer Kwasi Kwarteng, confirming he was abandoning the controversial plan to remove the UK’s 45 per cent top rate of tax after a revolt from Tory MPs.
The Bank of England had to step in on Wednesday to restore order to Britain’s long-dated government bond market, which seized up when pension funds rushed to raise cash amid the turbulent market reaction to Mr Kwarteng’s September 23rd mini-budget.
“We get it, and we have listened,” Kwarteng tweeted.
The humiliating U-Turn, however, raises stark questions about his and prime minister Liz Truss’s credibility. Ms Truss had pledged on Sunday not to change course.
While sterling appreciated in value and government borrowing costs fell on foot of the about-face, the mini-budget still means borrowing billions to fund energy price caps and other tax cuts, raising questions about the UK’s debt sustainability. That’s likely to stir more volatility in the coming days.
“The tax U-turn represents a small fiscal saving, but the message behind it is that further tax cuts are now likely to be off the table,” Hetal Mehta, senior European economist at Legal & General Investment Management, said.
At the Tory party conference in Birmingham yesterday, Mr Kwarteng tried to moderate the narrative, saying the government “will forge a new economic deal for Britain backed by iron-clad commitment to fiscal discipline”.
He also said the government would publish its plan in more detail in the coming weeks, this time with an assessment from the Office for Budget Responsibility, something that was quashed last time.
The concern, however, is that market turmoil could quickly return if Ms Truss and Mr Kwarteng don’t come up with a better explanation about how their low-tax agenda will be funded.