UK government makes vital U-turn on tax cuts, but battered UK markets require more than that before confidence returns.
After three trying weeks, British Prime Minister Liz Truss and incoming Finance Minister Jeremy Hunt will need to do much more than reverse their position on corporation tax on Friday.
The UK government’s announcement of its medium-term budget plan on October 31 will serve as a chance for Truss and Hunt, a former foreign minister, to regain the confidence of investors.
In anticipation of the policy change, the price of the pound and UK government bonds increased on Thursday and Friday. However, they fell after Truss’s brief news conference on Friday, which disappointed experts.
According to Richard McGuire, head of rates strategy at Rabobank in London, “undertaking a U-turn that is forced doesn’t really give the impression that Liz Truss is driving forward with a credible policy plan but instead is reacting to developments as they unfold, which by itself doesn’t engender much confidence.”
Gains earned in anticipation of the company tax U-turn evaporated as Truss spoke on Friday.
Ten-year gilt yields were 40 bps above Friday’s session lows, which were also driven higher by changes in bond yields around the world. This puts them about 80 basis points above where they were prior to the government’s mini-budget on September 23, which started the present unrest.
The pound dropped more than 1% versus the dollar and is now 0.6% below where it was before September 23.
Investors and experts claimed that the “mini-budgetinitial “‘s problems were only partially solved by the reinstatement of a previously scheduled corporate tax increase.
The decision made on Friday was referred to as a “mini-U-turn” by Capital Economics’ senior UK economist, Paul Dales, who also noted that there were still 25 billion pounds ($28.07 billion) in unfunded tax cuts, down from 45 billion pounds in the initial proposal.
He projected that in order to put the debt-to-GDP ratio on a declining path in three years, the Office for Budget Responsibility, Britain’s fiscal watchdog, will ask to be covered 43 billion pound hole in the public finances.
