'We went too far, too fast': Chancellor scrambles to 'stabilise' economy - with Trussonomics junked

16 October 2022

Jeremy Hunt said he wants to create "growth underpinned by stability". Picture: Alamy

By Asher McShane

@ashermcs

Liz Truss's so-called 'Trussonomics' vision for the UK finances appears doomed after the Chancellor halted her tax-cutting agenda - while she seeks to stay in power despite an increasingly shaky-looking premiership.

New Chancellor Jeremy Hunt, brought in to replace the sacked Kwasi Kwarteng and to restore credibility to Downing Street, spent Saturday effectively trashing the mini-budget and the set of policies that brought Ms Truss to power.

Amid warnings of "difficult decisions" to come over the next two weeks, Mr Hunt and Ms Truss will meet in her Chequers residence on Sunday as tax rises and spending cuts loom on the horizon.

The Chancellor, who spent Saturday also meeting with Treasury officials, insisted that he and the Prime Minister were a "team" as he said that his priority was "growth underpinned by stability".

"The drive on growing the economy is right - it means more people can get good jobs, new businesses can thrive and we can secure world class public services. But we went too far, too fast," he said.

Earlier, he told broadcasters: "Spending will not rise by as much as people would like and all Government departments are going to have to find more efficiencies than they were planning to."

"And some taxes will not be cut as quickly as people want. Some taxes will go up. So it's going to be difficult."

As Mr Hunt begins his job of putting together a fresh budget for October 31 one possible plan, as reported in the Sunday Times, would be to delay his predecessor's aim of reducing the basic rate of income tax by a year as part of a wider package designed to calm the financial markets.

Earlier, Governor of the Bank of England Andrew Bailey said he spoke to Mr Hunt on Friday after his appointment as he warned that interest rates may have to be raised higher than initially expected to tackle inflation.

Speaking from Washington, he said the pair had a "meeting of minds" on the issue of "fiscal sustainability" as he noted the fact the Office of Budget Responsibility is now "very much back in the picture".

US President Joe Biden also appeared to join in the criticism of Ms Truss's plan, telling reporters: "I wasn't the only one that thought it was a mistake" and calling the outcome "predictable".

Asked about her original economic strategy, he added that while he disagreed with her plan, it was up to the British people.

Mr Biden also dismissed concerns about the strength of the dollar: "The problem is the lack of economic growth and sound policy in other countries."

Questions still hang over the Government about whether it would be able to win enough support from a divided party for a series of painful decisions on tax and spending that have already prompted memories of the austerity era under David Cameron and George Osborne.

In a media blitz over the weekend, both Mr Hunt and Ms Truss tried to win over their own party and voters to the new Downing Street regime.

After completing several interviews on Saturday, the new chancellor will later appear on BBC One's Sunday with Laura Kuenssberg.

Ms Truss, who used a piece in The Sun newspaper to admit that sacking her friend and ideological soulmate Mr Kwarteng had been a "wrench", said: "We cannot pave the way to a low-tax, high-growth economy without maintaining the confidence of the markets in our commitment to sound money."

Mr Hunt, writing in the Telegraph, said that the Government was "changing course".

So far, his appointment has failed to dampen speculation of an imminent coup against Ms Truss.

Rishi Sunak, the defeated leadership contender and former chancellor, as well as Defence Secretary Ben Wallace, have been among the names flagged as potential replacements.

Sir Geoffrey Clifton-Brown told LBC on Saturday that for Ms Truss it all hinges on how the markets receive the fiscal plan at the end of the month.

While he said he believes Mr Hunt could steady the ship, he warned that if "it doesn't manage to satisfy the markets and satisfy everybody else and the economy is still in chaos then I think we would be in a very difficult situation".

Elsewhere, there was speculation that including the Ministry of Defence in any round of spending cuts could spark a clash with Mr Wallace.

A defence source said he will hold Ms Truss to the pledges made.

Ms Truss promised to increase defence spending to 3% of GDP by 2030 in the wake of the war in Ukraine.

The Prime Minister nonetheless still has her defenders within the party.

Former culture minister Nadine Dorries, a loyal follower of Boris Johnson, wrote in the Daily Express: "The sad truth is that those scheming to eject the Prime Minister from Downing Street are the same plotters who conspired to get rid of Boris. They will not rest until they have anointed their own chosen leader in power."

The Labour Party, looking on as it enjoys a mammoth lead in the polls, said that there were "no historical precedents" for the crisis the Truss administration had plunged the country into.

In a speech in Barnsley, Sir Keir Starmer referenced former party leader Neil Kinnock's famous 1985 attack on the left-wing Militant group in Liverpool as he pointed to the "grotesque chaos of a Tory Prime Minister handing out redundancy notices to her own Chancellor".

Sir Charles Bean: Rising interest rates not merely a 'global phenomenon'

Oct 16, 2022

Sir Charles Bean, a former deputy governor at the Bank of England, today admitted that rising interest rates are a result of British economic decisions. Speaking to Sophy Ridge, Sir Charles said it is "disingenuous" to say the UK's economic issues are down to a "global phenomenon". Keep up with all the latest reaction and analysis in the Sky News Politics Hub: https://trib.al/ecixuwi

'It's over': Time 'running out' for Truss as Tories turn on her after humiliating tax u-turn

15 October 2022

Liz Truss has reversed her flagship tax policy. Picture: Alamy/Getty
 
By Asher McShane@ashermcs

Liz Truss is continuing to cling to power as Tories turn on her after announcing a humiliating tax u-turn and sacking Kwasi Kwarteng as Chancellor.

The Prime Minister ditched a major chunk of her mini-budget in an extraordinary gamble to stay in power, saying at an eight-minute press conference on Friday that the plan would raise £18 billion pounds per year.

Ms Truss forced her friend Kwasi Kwarteng out of office and U-turned on her commitment to drop the planned rise in corporation tax from 19% to 25%, a central plank of her leadership campaign.

Ms Truss did not address the criticism of the government after the turmoil unleashed by the mini Budget at the end of last month - and did not respond to a question from ITV asking if she would apologise.

The Prime Minister only answered four questions before walking out, in a tetchy performance on Friday afternoon.

This morning Lord Gavin Barwell, Theresa May's former chief of staff, told LBC the "national interest would be best served" if Truss resigned.

"The polls are so bleak I don’t think Tory MPs are going to give her much more time to turn this round," he said.

One former Cabinet minister said the PM had been "robotic" and made the situation worse for herself.

"What an absolutely shambles. She's got to go. After eight minutes... 'I'm going to walk off, I don't have to take this sh**,'" the MP told MailOnline.

"She has burned the house down and she is the chief firefighter. She is now going to be running the country on policies that she trashed completely in the leadership contest... why isn't she joining Kwasi under the bus?"

Another senior minister told the i paper: "It’s over, I imagine.”

A former minister added: "Credibility can be retained to some extent under a new leader but not this one."

It comes amid reports that Tory MPs are planning to outs the PM in favour of Rishi Sunak and Penny Mordaunt.

Several rebels are actively considering demanding a resignation within days.

However, loyalists have warned that another leadership switch could trigger an election before Christmas and mean the Tories are forced out of power.

Read more: Liz Truss 'will resign this afternoon or be gone within the next two weeks', says Andrew Marr

Ms Truss sacked her Chancellor Kwasi Kwarteng earlier on Friday with Jeremy Hunt installed in his place. Mr Hunt arrived at Downing Street for a meeting with Ms Truss on Friday afternoon at about 4.15pm.

She told the press conference: "It is clear that parts of our mini-budget went further and faster than markets were expecting. So the way we are delivering our mission right now has to change.

"We need to act now to reassure the markets of our fiscal discipline.

"I have therefore decided to keep the increase in corporation tax that was planned by the previous government.

Read more: Jeremy Hunt appointed Chancellor after Kwasi Kwarteng sacked

"This will raise £18 billion per year. It will act as a down payment on our full medium-term fiscal plan which will be accompanied by a forecast from the independent [Office for Budget Responsibility].

"We will do whatever is necessary to ensure debt is falling as a share of the economy in the medium term.

"Kwasi Kwarteng. Picture: Getty

The embattled Ms Truss said the UK would "get through this storm".

She added: "I want to be honest, this is difficult, but we will get through this storm. And we will deliver the strong and sustained growth that can transform the prosperity of our country for generations to come."

Jeremy Hunt. Picture: Getty

Mr Kwarteng was fired on Friday after just 38 days in the job.

Ms Truss said: "I met the former chancellor earlier today. I was incredibly sorry to lose him.

"He is a great friend and he shares my vision to set this country on the path to growth.

She called Mr Hunt "one of the most experienced and widely respected Government ministers and parliamentarians, adding that he "shares my convictions and my ambitions for our country."

The u-turn came after a government minister said just on Friday morning that there were no plans to change tack on corporation tax.

Trade minister Greg Hands said that there were "absolutely no plans to change anything", speaking to LBC's Nick Ferrari on Friday morning. He also said that Mr Kwarteng was secure in his position, echoing comments made by the former Chancellor himself the day before.

Labour's shadow chancellor Rachel Reeves criticised the government. Picture: Getty

Opposition parties criticised Ms Truss after the press conference, with Labour saying the government needed to scrap its economic plan altogether.

Shadow Chancellor Rachel Reeves told LBC: "There's still much in the budget from just three weeks ago that is causing concerns in financial markets, and so much has already been done, with people’s mortgage rates higher and people worrying about their pensions as well.

"So instead of just another Conservative chancellor in this year alone, what we need now is a Labour government, which would prioritise economic stability."

Liberal Democrat leader Sir Ed Davey told LBC: "If the British people were brought into this conversation, she'd go now."

Some Conservatives rallied behind Ms Truss in the wake of the press conference, with close ally Therese Coffey tweeting: "The PM is right to act now to ensure our country's economic stability - key for families and businesses - and reassure the markets of our fiscal discipline, especially in light of the worsening global economic conditions with Putin's illegal invasion of Ukraine."

Thérèse Coffey spoke out in support of Liz Truss after the press conference. Picture: Getty

Nadhim Zahawi. Picture: Getty

Former Chancellor Nadhim Zahawi said: "It's time to get Britain moving. We are determined to grow the economy, eliminate the covid backlog and protect people from Putin's energy warfare."

The corporation tax climbdown is just the latest in a series of u-turns performed by Ms Truss' government in its few weeks in office.

The government has also rowed back on cutting the 45p top rate of income tax, as well as a policy of not giving out "handouts" to help people with higher energy bills by introducing a massive support package.

UK

PENSIONS & RETIREMENTPERSONAL & WORKPLACE PENSIONS

Is my pension safe?


By Mark Benson ·

Following the government's mini-budget, which sparked financial chaos, the question on many of our lips is whether our pensions are safe.

The repercussions of the government's mini-budget in September are still being felt today. While the concept of Liz Truss’s growth strategy has been called into question, it was the unfunded tax cuts that caused panic in financial markets. As markets began to lose faith in the UK government, the pound came under pressure, and the cost of borrowing increased. This has created instability in the pensions sector, but it is vital to put this into context.

Which pension arrangements have been hit hardest?

There are two types of pension, defined benefit (otherwise known as a final salary scheme) and defined contribution (otherwise known as a money purchase scheme). A defined benefit pension scheme guarantees an income in retirement based on your final salary and years of service. The employer must ensure sufficient funds are available to pay member pensions in retirement.

A defined contribution scheme is dependent upon contributions and investment performance. Upon retirement, various options exist, such as drawdown and annuity purchase. Unlike a defined benefit scheme, there is no guarantee of future income with a defined contribution scheme. Your pension investments are literally at the beck and call of the markets and the options available at the time of retirement.

Defined benefit schemes hit by money market turmoil

Defined benefit schemes require a degree of income security to fulfil their retirement pension obligations to members. In theory, gilts (gilt-edged securities) are considered exceptionally low-risk investments, as the government guarantees them. Consequently, this type of investment is very popular with defined benefit schemes focusing on long-term maturity of between 20 and 30 years. So far, so good, but why has recent turmoil impacted defined benefit schemes?

Many defined benefit pension schemes use complex derivatives based on long-term gilt yields to match assets with liabilities. This is known as Liability Driven Investment, a type of insurance requiring pension funds to provide collateral. When markets lost confidence in the UK government, this prompted a sell-off of long-dated gilts and increased government borrowing costs. As gilt yields rose, the pension funds were forced to provide more collateral to maintain their Liability Driven Investment strategy. As a result, many defined benefit pension schemes were forced to reduce their investment in long-dated gilts to raise this capital.

In what quickly became a vicious circle, the more long-dated gilts sold, the lower the price and the higher the yield. As the yield continued to rise, pension funds were required to increase collateral further, raising funds by selling more long-dated gilts. Only when the Bank of England stepped in as a buyer of up to £65billion of long-dated gilts did the selling pressure ease.

Why was the Bank of England so important?

Just before the mini-budget on 23 September, the 30-year government bonds (gilts) yield stood at around 3.5%. However, the contents of the mini-budget prompted a sell-off in the long-term gilt market, with yields increasing to 5% (the government's cost of borrowing). On 28 September, the Bank of England announced plans to intervene and buy up to £65 billion of long-dated gilts until 14 October. In effect, the Bank of England became the buyer of those gilts which the defined benefit pension schemes were forced to sell to raise collateral. There was an almost immediate impact which saw prices recover and the yield on long-dated gilts fall to around 4%. However, in early October, markets began to grow more concerned. By 12 October, long-term gilt yields had increased to 5%. 

Why has the initial recovery reversed?

The Bank of England warned defined benefit pension schemes that they would need to "get their house in order" by 14 October. Forced to react in a relatively short timescale, further selling of long-dated gilts has increased yields, even though the Bank of England is buying up to £6 billion worth of gilts per day during the buyback programme. In what could be seen as a case of the tail wagging the dog, gilt yields have since fallen back slightly, with many investors convinced the government will need to backtrack on tax cuts.

What next?

While the Bank of England buyback programme is expected to end on 14 October, other options are available. As the governor of the Bank of England has said on numerous occasions, they will step in if they feel there is a material risk of financial instability to the UK. This concern prompted the recent support programme, and it is inconceivable that the Bank of England will sit back and do nothing if gilt yields remain stubbornly high. However, amid signs the government may be backtracking on more of its mini-budget proposals, many are starting to see the light at the end of the tunnel.

Are defined contribution schemes impacted by the turmoil?

As there is no certainty of income in retirement from a defined contribution scheme, these schemes will have relatively low exposure to long-term gilts. In lay terms, upon retirement, the value of your pension investments will be used to provide an income based on market prices at the time. Consequently, the impact from the gilt sell-off is considerably less than that for defined benefit schemes. However, market turmoil has affected the price of shares on the London stock exchange, which has impacted the value of defined contribution pension assets.

It is also worth remembering that those approaching retirement may look towards greater income security. In some cases, this may mean a switch to bonds which could include long-term gilts. In a worst-case scenario, those impacted by recent market movements may be forced to consider delaying their retirement until the value of their investments recovers. In this scenario, it is essential to take professional advice from a pension specialist, as you must consider numerous factors.

Are pension funds protected?

With a defined benefit pension scheme, it is your employer's legal obligation to ensure the scheme is fully funded and able to cover liabilities. In the event of a shortfall, your employer may need to add additional funds to the scheme. Consequently, one of the main risks with a defined benefit scheme is that your employer or ex-employer goes bust. However, the Pension Protection Fund (PPF) was set up in 2005 to protect employee pensions.

If your employer or ex-employer were to collapse, leaving a shortfall in the employee pension scheme, the PPF would step in. The PPF is funded through a mix of:

• Compulsory levy on defined benefit pension schemes
• Transfer of pension fund assets when a scheme fails
• Legal options to recover additional funding from insolvent employers

Consequently, the PPF can guarantee 100% of the pension owed to scheme members already in retirement. Those yet to retire will have 90% of their future pension guaranteed. There is a maximum annual pension limit of £41,461.07, but this will only impact around 0.5% of pension scheme members.

The situation for defined contribution schemes is different. These schemes are administered by parties authorised by the Financial Conduct Authority to operate in the UK. In the event of failure, the funds should already be ring-fenced, with assets moved to another authorised administrator. Where there is a financial loss for the member, they may be able to claim compensation from the Financial Services Compensation Scheme.

Is your pension safe?

The potential knock-on effect of a concerted sell-off in the long-dated gilts market would impact the government, individuals and businesses. The short-term buyback programme announced by the Bank of England offered a degree of support but is not a long-term solution. Amid the danger that some pension schemes would become insolvent, placing massive pressure on the PPF, the government and Bank of England must devise a viable solution. 

The next few days will be crucial for money markets, pension schemes and the UK government. Due to differences in their structure, defined benefit pension schemes have been hit much harder than their defined contribution counterparts. However, even in a worst-case scenario, the PPF will guarantee both existing and future pension payments.

UK
Tory prime ministers have ‘collectively got us into this mess’ – Blackford

Liz Truss should not be in office ‘one day longer’, the SNP’s Westminster leader has said.


Ian Blackford said Tory prime ministers since 2010 have been collectively responsible for the economic turmoil in the UK since Liz Truss took over (Andrew Milligan/PA) / PA Wire

By Lauren Gilmour

The SNP’s Westminster leader Ian Blackford has said Tory prime ministers since 2010 have “collectively got us into this mess”, after Kwasi Kwarteng was replaced as chancellor on Friday.

Speaking to the BBC’s Good Morning Scotland on Saturday, Mr Blackford branded the situation a “shambles” and called for a general election after Liz Truss sacked Mr Kwarteng and parachuted former foreign secretary Jeremy Hunt in to Number 11 in his place.

“We’ve really seen the credibility for financial competence, for financial management of this Government really put to bed,” he said.


I think it makes the point to us that we don't have to rely on another Westminster government dragging Scotland through the mire, that there is an alternative

“Over the last few years, we’ve gone from Cameron, we’ve had Theresa May, we’ve had Boris Johnson, we’ve now had the shambles of Liz Truss.

Demonstrators block Downing Street gates in protest at PM’s climate approach

“None of these prime ministers have acted in the interests of the people of Scotland and collectively they have got us into this mess. It’s not another Tory prime minister that we need. We need away from Westminster, we need independence.”

Mr Blackford joined Labour leader Sir Keir Starmer’s calls for a general election, saying there had been a “whole series” of “shambolic” Tory governments.

He added: “We want the ability to remove this Tory Government.

“But of course, we’ve had a whole series of shambolic Tory governments over the course of the last few years.”

The Ross, Skye and Lochaber MP argued that the situation backed up the arguments for Scottish independence.

“I think it makes the point to us that we don’t have to rely on another Westminster government dragging Scotland through the mire, that there is an alternative and that alternative is Scotland becoming an independent country.

“I think what’s becoming increasingly clear to people is that we need away from this.

“I think what we need to do over the course of the coming weeks, is to have that debate about Scotland’s future and contrast that future of Scotland as an independent country back into Europe – because let’s not forget the damage that Brexit has done – about making sure that we’re driving the investment into the economy, giving people hope that for the families that have children or grandchildren, that they can be safe in the knowledge that this will be a prosperous country, a fairer country, a greener country.

“That’s not what we get from Westminster and that’s the questions that we need to be discussing with people on the doorstep.

Mr Blackford said Westminster “caused” the issues of higher energy bills and rising food prices and said the cost-of-living crisis was “exactly why” a conversation on a second referendum was needed.


“Westminster does cause these problems and that is a real crisis that people are facing.

“Without engaging in hyperbole, there’s a real possibility that many people will even be faced with the issue as to whether or not they can afford to stay in their own home with the increase in mortgage costs.

“But it doesn’t have to be this way. That’s the point,” he added.