黑洞社区

The short-lived era of Trussonomics came to a sudden and undignified end yesterday as the prime minister鈥檚 new chancellor junked almost the entirety of her plan for 鈥済rowth, growth, growth鈥� and instead set out his intention to stabilise the UK economy.

While embarrassing for Truss, the statement made by Jeremy Hunt appeared to achieve its stated aim, as the pound surged more than 2% against the dollar and UK borrowing costs tumbled, with the yield rate down by 40 basis points.

Paul Johnson, the director of the , said the announcement was 鈥渁 step in the right direction鈥�, but as Hunt himself admitted, telling the public to expect 鈥渕ore difficult decisions on both tax and spending鈥�, the government still has work to do to establish its fiscal credibility.

All government departments have been asked to find efficiencies, according to the chancellor, with Treasury leaks over the weekend indicating that the Office for Budget Responsibility was projecting a medium-term hole in the public finances of roughly 拢72bn.

The scrapped tax cuts will raise 拢32bn for the Treasury, according to Hunt, leaving a 拢40bn hole to fill if the government wants to achieve its aim of getting debt falling as a share of GDP by 2026-27.

A favourable market reaction to Hunt鈥檚 frugality could cover some of this gap 鈥� a 1% decline in gilt yields and interest rates would take off around 拢10bn. The IFS estimates that reduced borrowing costs, lower than expected interest rates and a revised growth forecast would leave the chancellor with roughly 拢20bn to cut.

There are several options for how to achieve this, including U-turns on what remains of Kwarteng鈥檚 mini-budget. Allowing national insurance to rise would save 拢15.3bn, while cancelling the cut to stamp duty would free up 拢1.7bn.

Noble Francis, economics director at the Construction Products Association, told 黑洞社区 it was 鈥渄ifficult to see further U-turns鈥�, given the government鈥檚 focus on growth, the predicted recession and the prospect of an election in two years.

Indexing working age benefits to earnings instead of inflation (拢13bn) has been much discussed in recent weeks, but the optics of cutting benefits in a cost of living crisis while lifting bankers鈥� bonus cap may render this too politically difficult.

Mike Brewer, chief economist at the Resolution Foundation, said last week that cuts to benefits or public services were unlikely to get through parliament.

Responding to a question from former shadow chancellor John McDonnell in the Commons yesterday, Hunt said he could not make any assurance that benefits would be uprated in line with inflation, but hinted that he was minded to do so, referring to an earlier comment stressing his 鈥渃ompassionate conservative鈥� values.

>> Also read: Kwarteng鈥檚 growth plans: what does it all mean for infrastructure projects?

>> Contractors 鈥榯hrown under the bus鈥� by government鈥檚 IR35 flip-flop, say compliance firms

The alternatives are widespread austerity across Whitehall, which could offer savings of tens of billions, or reducing public investment 鈥� cutting this by a third to 2% could save 拢14bn.

鈥淭hat may be the least politically painful way to make the sums add up in two weeks鈥� time, but it鈥檚 would also be the most-growth sapping,鈥� said Brewer.

While such an approach would directly contradict the government鈥檚 stated commitment to growth, recent weeks have shown that such a volte-face cannot be ruled out.

The constant uncertainty over policy during a period in which the economy is slowing is poor government and bad policy making

Noble Francis, Construction Products Association

It will be interesting to see what role the chancellor鈥檚 new economic advisory council 鈥� announced in his statement to the House of Commons but accidentally leaked beforehand when photographs of briefing documents were posted to the Treasury鈥檚 Flickr page 鈥� will play in determining which of these options are taken.

Four independent experts have so far been announced as having been appointed to the council: Karen Ward, managing director at JP Morgan Asset Management; Dr Sushil Wadhwani is the chief investment officer at private equity fund QMAW; Gertjan Vlieghe, former Bank of England policymaker and chief economist at US hedge fund Element Capital; and Rupert Harrison, former chief of staff to George Osborne when he was chancellor.

While financial markets appear to have calmed, the coming weeks will likely be nervy for industry, with speculation over where cuts will fall sure to weaken business confidence.

鈥淭he constant uncertainty over policy during a period in which the economy is slowing is poor government and bad policy making,鈥� said Francis.

鈥淚t puts off firms looking to invest, whether it is in skills and product manufacturing capacity as well as developers looking to make large upfront investments in commercial, industrial or residential construction.鈥�