Hunt Warns UK Faces Tax Rises in Clear Sign Trussonomics Is Over

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Chancellor of the Exchequer Jeremy Hunt said the UK faces tough choices on tax and spending, as he seeks to calm financial markets with a marked change of economic direction following weeks of chaos triggered by his predecessor and Prime Minister Liz Truss.

“Spending will not go up as much as people want and there’ll be more efficiencies to find,” Hunt said Saturday in a Sky News interview. “We won’t have the speed of tax cuts we’re hoping for and some taxes will have to go up — that’s the reality of the very challenging situation we face.”

Hunt replaced Kwasi Kwarteng in charge of the UK’s purse strings on a dramatic Friday, which saw Truss fire her longstanding ally and make another major U-turn on her economic strategy in a desperate bid to keep her job.

Desperate Bid to Save UK Premiership Lands Truss in More Trouble

The new chancellor made clear that while he agrees with Truss’s argument about the need for growth, he disagrees with how she and Kwarteng went about it. Using borrowing to fund tax cuts “doesn’t work,” he told BBC Radio. Other “mistakes” included trying to cut taxes for the UK’s highest earners, he told Sky News, a plan they abandoned after a ferocious political backlash.

Tough Choices

The new chancellor faces a huge challenge to calm markets. While Truss said canceling her plan to freeze corporation tax will raise £18 billion ($20 billion) a year, Bloomberg Economics estimates about £24 billion more savings or revenue raising is needed to put debt back on a sustainable track.

“The thing that people want, the markets want, the country needs now is stability,” he said. “No chancellor can control the markets. But what I can do is show that we can pay for our tax and spending plans.”

Hunt said all government departments would have to find “efficiencies,” which when pressed, he acknowledged could, in fact, mean “cuts.” He denied there would be a return to austerity on the level imposed by the Conservative-led coalition government in the early 2010s.

His comments potentially set Truss up for another humiliating U-turn, after she tried to assure her restless MPs in Parliament on Wednesday that there would “absolutely” not be spending cuts. Hunt also declined to commit to Truss’s pledge to raise defense spending to 3% of economic output, though he added he would make no commitments until he’s seen the Treasury numbers.

Truss Talks

That process begins with his officials on Saturday, he said, before he holds talks with Truss at her country residence, Chequers, on Sunday.

Truss Brings in Rival Who Could Steady the Ship, or Take Her Job

It’s a dramatic change of tone from the one taken by Truss and Kwarteng, who had staked their political reputations on an all-out push for growth through the biggest set of tax cuts in half a century. Truss’s rival for the top job in the Tory leadership contest, former Chancellor of the Exchequer Rishi Sunak, spent the campaign warning that Trussonomics would trigger market turmoil.

That prediction was borne out as Truss and Kwarteng failed to convince financial markets their plan was credible. Their Sept. 23 package triggered a sell-off that sent the pound to an all-time low against the dollar and forced the Bank of England to intervene in the gilts market to prevent a key part of the pensions industry from collapsing.

After his own leadership bid was cut short, Hunt had backed Sunak — and there are echoes of the former chancellor’s argument — that growth policies should wait until after public finances are in good order — in what the new finance minister said.

Past Mistakes

“It was a mistake when we’re going to be asking for difficult decisions across the board on tax and spending to cut the rate of tax paid by the very wealthiest,” Hunt told Sky. “It was a mistake to fly blind and to do these forecasts without giving people the confidence of the Office for Budget Responsibility saying that the sums add up.”

But while Hunt told the BBC he thinks Truss remains the best person to lead the country, the change of economic direction are likely to exacerbate the feeling among restless Conservative MPs that they should keep her.

Support for the Tories has slumped in opinion polls, as market uncertainty around the UK’s public finances drove up mortgage rates for millions of people.

“We have to be honest with people that if we want to keep the rises and interest rates as low as possible, then we have to give certainty to the markets that we really can fund every penny of our plans,” Hunt said.

Turbulent Markets

Truss’s double maneuver on Friday of sacking Kwarteng and saying corporation tax will now rise to 25% from 19% next year as had been previously planned by her predecessor, Boris Johnson, failed to steady the ship, with the pound and gilts both falling after she spoke.

High Priests of Trussonomics ‘Sad, Angry and Frustrated’

“We do not expect financial concerns to abate,” Citigroup Inc. economists Benjamin Nabarro and Jamie Searle said in a report to clients. “Instead, we believe further market instability likely lies ahead. Truss may struggle to remain in post, but more broadly the UK now faces a period of heightened market uncertainty without a clear policy strategy.”

That leaves Hunt with a major job to do — especially as the central bank’s intervention in the bond market ended on Friday. The new chancellor has just over two weeks to come up with a package of measures that will convince the markets that he has a handle on the UK finances.

On Oct. 31 he’s due to deliver a medium-term fiscal strategy to spell out how the government will start to bring down the national debt as a proportion of output, and at the same time, the OBR, the government’s independent fiscal watchdog, will produce a set of economic forecasts.

“It’s going to be difficult,” Hunt told the BBC.