Liz Truss’s bid to calm the markets by sacking her chancellor and U-turning on corporation tax appears to have failed as the pound fell again and the cost of government borrowing rose after her press conference on Friday.
Trading in the pound and gilts – UK government bonds – became more positive early on Friday after reports that parts of the Truss government’s tax-cutting mini-Budget would be scrapped.
But the markets did not react well to the prime minister’s seven-minute appearance at No 10, at which she announced she would let corporation tax rise from 19p to 25p and was replacing Kwasi Kwarteng with Jeremy Hunt.
After stock markets closed, the pound dropped 1.2 per cent and could buy just 1.12 US dollars. Ms Truss’s update to her plans also sparked another worrying jump in gilt yields – the borrowing costs which rise as government bond prices fall.
The yield on 30-year UK government bonds increased by 0.3 percentage points to 4.8 per cent – representing another increase in the cost of state borrowing.
Paul Johnson, director of the Institute for Fiscal Studies (IFS) think tank, said “piecemeal” announcements – and changing chancellor – will not be enough to reassure markets, saying the Truss government’s credibility had been “lost”.
“We still have got no statement of economic policy, of fiscal policy, or any sense of how we’re going to get to fiscal sustainability,” Mr Johnson told BBC Radio 4’s PM programme:
The IFS chief added: “I think the issue is that credibility has been lost and these piecemeal announcements, piecemeal announcements of sacking a chancellor or changing one tax here or there, aren’t going to cut it.”
Pressure to gilts had returned on Tuesday after traders were spooked by Bank of England governor Andrew Bailey’s firm message that the central bank’s emergency bond-buying scheme would not be extended beyond Friday.
However, an increase in gilt purchases by the Bank towards the end of this week, as well as rumours regarding major government policy reversals, helped prices recover.
But the response to Ms Truss’s intervention on Friday afternoon suggests markets still believe further changes and further clarity are needed from No 10 and the Treasury.
The prime minister and her officials had reportedly been considering reversals on plans for VAT-free shopping for foreign visitors and cuts to dividend taxes. But Ms Truss announced only a U-turn on corporation tax – worth £18bn a year to the Treasury’s coffers.
Mr Johnson said the government would now be “desperate” to get to fiscal statement on 31 October. The IFS chief pointed to a significant “change in tone” from Ms Truss on the prospect of major spending cuts ahead.
Signalling significant real-terms cuts were on the way, Ms Truss said: “We will control the size of the state … And spending will grow less rapidly than previously planned.”
Mr Johnson responded: “On Wednesday, we heard the prime minister say no spending cuts. Today we’ve heard the prime minister say spending less quickly than planned. Well, as I say, less quickly than planned sounds a bit like cuts to me.”
Torsten Bell, chief executive of the Resolution Foundation, said the limited nature of the U-turn on tax meant major cuts to public spending would still be needed.
“So over half of tax cuts are still going ahead. What does this mean? £20–£40bn of spending cuts still to come,” the think tank chief tweeted.
By the time the emergency bond-purchasing programme ended on Friday, the central bank had spent just £19.3bn of the £65bn it pledged to prop up the market at the end of September – spending just £1.5bn on the final day.
Nick MacPherson, former top civil servant at the Treasury, said Bank of England governor Andrew Bailey had been responsible for a major change in economic policy from the Truss government.
“All credit to Bailey of the Bank … whose Friday deadline has forced the government to adopt a more orthodox economic policy and thus restore order to the markets,” he tweeted.
