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Pound rises above $1.13 after UK government backtracks on nearly all tax cuts

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UK Finance Minister Jeremy Hunt has backtracked on tax cuts announced just weeks ago. He suspended a basic income tax cut, the government’s latest U-turn after the plan rattled markets. The pound rose above $1.13, continuing its gains as investors welcomed the move to regain credibility. Something is loading.

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The pound rose above $1.13, adding to earlier gains against the dollar on Monday, after the UK’s new finance minister, Jeremy Hunt, backtracked on huge tax cuts announced there just a few weeks old.

“We are going to cancel almost all tax measures announced in the growth plan three weeks ago which have not started parliamentary legislation,” the chancellor said in an emergency statement.

The pound rose 1% to $1.1320 on the news, having started rising earlier on Monday on a Sunday Times report of an upcoming income tax cut.

Hunt has indefinitely suspended plans to cut the basic rate of income tax from 20% to 19% and cut support for households facing steep rises in their energy bills.

He said the measures are expected to bring an additional £32bn ($36.1bn) a year to the Treasury. “It’s not fair to borrow to fund this tax cut,” he said.

The finance minister’s statement is seen as an attempt to calm markets still worried about the impact of huge budget cuts on the economy. Investors were concerned about the lack of information on how the government would fund fiscal policy.

“The message is really one of calm and getting the helm back,” said Chris Beauchamp, chief market analyst at IG.

“This heightened self-awareness, as well as Hunt’s reputation as more of a ‘sure pair of hands’ certainly seems to have reassured everyone. For now, the market seems happy to give the new chancellor the time and l space to put the house of government in order,” he added.

The Treasury brought forward the announcement of the tax measures by two weeks to Monday, after a series of sharp government reversals on its mini-budget failed to allay concerns about its economic credibility. The full plan is still due for release as scheduled on October 31.

Since Hunt took office on Friday, replacing Kwasi Kwarteng, who was sacked after markets spooked over tax plans, he presented a mini-budget earlier in October. The pound slumped to an all-time low against the dollar, and yields on UK government bonds (gilts) climbed as the tax plan stoked fears of faster inflation and public debt spiral.

The turmoil prompted Nobel laureate Paul Krugman to say that UK markets were “behaving like those of a developing country”.

That and political pressure on Prime Minister Liz Truss has led to a series of reversals on fiscal plans in recent days. These include scrapping a planned rise in corporation tax from 19% to 25% and backtracking on the plan to cut the top tax rate by 45%.

The pound began its rise earlier on Monday after the Sunday Times reported that Hunt was to delay a planned reduction in the basic income tax rate by a year, citing unidentified sources.

The report also says the UK’s Office for Budget Responsibility – a public body that analyzes public finances – predicts a shortfall of up to £72billion in public coffers by 2027-2028.

The OBR did not respond to a request for insider comment.

The UK economy is on the brink of recession, after a surprise 0.3% fall in GDP in August. The economy also contracted 0.3% in the three months to August – its first decline since the start of 2021 amid the COVID-19 pandemic. A recession is generally defined as two consecutive quarters of declining GDP.

This story has been updated to reflect details of Hunt’s tax measures, after the previous version announced that the statement was coming.

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