In what has been a whirlwind start to Liz Truss’ term as Prime Minister, Chancellor Kwasi Kwarteng was forced to leave the International Monetary Fund’s (IMF) autumn congress early to meet with the Prime Minister, which ended with the Chancellor’s dismissal. Mr Kwarteng has been replaced by Jeremy Hunt.

The 38 days that Mr Kwarteng was in office were interesting to say the least. After setting out a very bullish ‘mini budget’ which lacked evidence of how all the tax cuts and increased spending would be paid for, the Government ended up in a tussle with the Bank of England on the future path of the UK economy. The government’s plan to increase growth was the complete opposite to the Bank of England’s task of bringing down inflation by curbing spending and limiting growth.

The release of the ‘mini budget’ led to increases in volatility, with UK assets being whipsawed on news flow, changing policies and underlying economic conditions. It did seem that the Chancellor may have won the first battle, with the Bank of England stepping into the Gilt market to provide financial stability.

A purchase programme was set up to buy long dated Gilts to keep prices from falling further and putting additional pressure on defined benefit pension schemes. The Government did have to abandon the cut in the higher rate tax threshold to help their position, but the markets wanted more.

As we moved closer to the end of the Gilt purchasing programme, the Bank of England put pressure back onto the Chancellor and the Treasury by confirming that the programme would finish on the 14th of October. This was the final nail in the coffin for Mr Kwarteng, with Liz Truss removing him from office to provide stability, not just for the markets, but also her party. There have been reports, not just from the opposition, but also internally, that members of the Conservative party are not happy with what is happening.

The new Chancellor, Jeremy Hunt, has an extremely full in-tray to deal with. Even though he has just started his tenure, last week Mr Hunt made a U-turn on the promise not to increase corporation tax levels for businesses. Markets took this decision positively with the prospect of further changes in what was set out in the budget to come.

A full U-turn by the new Chancellor:

After the U-turn made on corporation tax rates last week, the new Chancellor has followed this up by making further reversals on nearly all the policies that former Chancellor Kwarteng published last month.

In a statement made to live television on Monday, Jeremy Hunt stated that ‘We will reverse almost all the tax measures announced in the growth plan three weeks ago that have not started parliamentary legislation’. He went on to say that governments could not control markets, but he could provide certainty of the sustainability of public finances.

The policies proposed in the mini-budget that are to be removed include the drop in income tax rate to 19% from 20% (from April 2023), the dividend tax cuts that were due to be undertaken and the introduction of VAT holidays for tourists.

There was also further information set out on the energy subsidy for UK homeowners, with the energy price cap being guaranteed until April 2023 and not the two years which was previously promised. This shorter term for providing caps on energy prices will lead to the Bank of England having to look at their inflation forecasts again as energy prices are a large portion of inflation figures. A shorter timeframe of support will impact inflation quicker than was first estimated from the previous plans set out by the former chancellor. This is extremely important as bringing down inflation continues to be the Bank of England’s number one priority.

The Chancellor will be setting out a new form of energy price support to come into place after April 2023, which the Treasury is currently putting together, but no details have been released on this yet.

The measures that are still in place and will continue through the legislative process are the stamp duty zero percent band increase, as well as the reversal of the 1.25% increase in National insurance for workers.

The UK market has taken the reversals positively so far, allowing for some of the short-term losses to be recovered. However, this is only the start of what could occur moving forward. The new Chancellor has highlighted that the £32 billion which will be saved from this announcement is only the start. Further spending cuts and tax rises may be implemented moving forward. Investors will be closely watching the Government’s next move and the medium-term fiscal plan, which is due to be released on the 31st October.

At the start of November, the Bank of England will be holding its next Monetary Policy Committee meeting. Investors will be glad to hear that the new Chancellor and the Governor of the Bank of England met over the weekend in what was described as a ‘meeting of minds’ by Andrew Bailey, the Governor of the Bank of England. For now, it seems like the Treasury and Bank of England are back on speaking terms and fully focused on driving the UK economy through the current headwinds by controlling inflation and interest rates and making sure fiscal prudency is adhered to.