UK borrowing costs tumble after Hunt shreds Truss’s mini budget

UK borrowing costs scaled lower today after new chancellor Jeremy Hunt ripped up prime minister Liz Truss’s tax cutting mini budget.

The yield on the 30-year UK gilt, which has suffered heavy selling since the mini budget last month, fell around 40 basis points to 4.33 per cent.

Rates on the 2-year and 10-year UK gilts also dropped sharply. Yields and prices move inversely.

The pound strengthened over two per cent against the US dollar. The FTSE 100 jumped 0.9 per cent, while the domestically-focused FTSE 250 surged 2.83 per cent.

Hunt today ditched nearly all of Truss’s mini budget, which was characterised as her blueprint for economic growth.

“No government can control markets, but every government can give certainty about the sustainability of public finances,” the chancellor said.

Truss’s economic strategy has been junked around six weeks after she won the Tory leadership race on a ticket promising tax cuts and supply-side reforms.

The two year £2,500 typical energy bill freeze has been scaled down to reduce its price tag. It will from next April apply to fewer households.

The treasury will now draw up plans to reshape the package so it costs “the taxpayer significantly less than planned whilst ensuring enough support for those in need,” Number 11 said.

Economists had projected the original package could have cost more than £100bn if gas prices remain high. It did avert what was forecast to be the biggest hit to living standards on record.

Hunt also ditched plans to bring forward the 1p cut to the basic rate of income tax, abandoned dividend tax cuts, removed alcohol duty freezes and junked plans to scrap changes to self-employed payroll taxes, known at IR35.

The reversals will raise over £30bn for the government, Hunt said.

He did stick to plans to scrap the 1.25 percentage point national insurance rise and raising the stamp duty threshold.

This morning, the treasury announced Hunt has brought forward parts of his fiscal statement from 31 October to today in a bid to tame market turmoil.

Hunt reversed pretty much all of Truss’s mini budget in which she and her former chancellor, Kwasi Kwartreng, launched £45bn of unfunded tax cuts and ramped up government borrowing.

Truss sacked Kwarteng last Friday and parachuted Hunt into Number 11.

Since the announcement on 23 September, UK markets have been extremely choppy. UK borrowing costs climbed to their highest level in over 20 years and the pound hit a record low against the US dollar.

Yield on 30-year UK gilt dropped today

Heavy selling in the bond market forced the Bank of England to set up a £65bn emergency support scheme to prevent a fire sale dynamic erupting in the pensions sector.

Pensions have invested heavily in liability driven investment (LDI) funds, which were forced to ditch bonds rapidly to repay creditors to cover losses, pushing yields higher.

Markets were also seemingly holding up well on the first day of the end of the Bank’s temporary bond purchase scheme.

Truss’s decision to launch the mini budget without an independent assessment from the Office for Budget Responsibility (OBR) on the impact on the public finances from the tax cuts and borrowing splurge.

The OBR has reportedly estimated the government was facing an around £70bn hole in the public finances caused by the mini budget. The full report will be published on 31 Ocotber.

Truss was forced into a second embarrassing U-turn and ditched plans to reverse the six percentage point corporation tax rise last week. She had already approved binning plans to get rid of the top 45p of income tax the day the Conservative Party conference kicked off.

“We are still flying blind with no OBR forecasts and no clarity of the impact of their mistakes,” shadow chancellor and Labour MP Rachel Reeves, said.

Hunt and Truss will have to cut real government by 4.5 per cent over the next few years to stabilise the UK’s debt, two percentage points more worth of cuts that former prime minister David Cameron and ex chancellor George Osborne oversaw during the austerity years after the financial crisis, according to Samuel Tombs chief UK economist at Pantheon Macroeconomics.

The UK will tip into a recession driven by lenders passing on higher rates in the debt markets to consumers through raising mortgage costs, Tombs added.

The Bank of England next month is expected to lift interest rates for the eighth time in a row by a historic 100 basis points, economists are predicting.

Fresh inflation figures out this Wednesday are likely to strengthen those bets, with the consensus forecast expecting an annual 10 per cent rate.

However, today’s U-turns will ease pressure on the Bank to keep raising rates rapidly by reducing the risk of high inflation embedding in the economy over the long run, economists said.

“The BoE will be under less pressure to take an aggressive approach to raising interest rates,” Andrew Goodwin, chief UK economist at Oxford Economics, said, adding “investors’ expectations will continue to retreat, coming down closer to our forecast of a peak in Bank Rate of four per cent”.