FTI Consulting Public Affairs Snapshot – Saviour or Assassin? As Hunt wields the axe on the mini-Budget, will Truss’s head roll too?

Overview of the changes announced

As widely trailed, the Chancellor announced that the Government will reverse most of the measures laid out in last month’s ‘Plan for Growth’ which drew widespread criticism from across the political and business spectrums. Changes to the dividend tax rate, off-payroll working reforms, VAT-free shopping for international visitors and alcohol duty have all been reversed, and the plan to reduce the basic rate of income tax to 19% from April 2023 has been delayed “indefinitely.” The reduction in stamp duty, and the reversal to the increase in National Insurance contributions as part of the Health and Social Care Levy have been retained, with Hunt saying that this was because they have already started their parliamentary passage.

Perhaps the most significant change, both politically and economically, was the announcement that the Government’s Energy Price Guarantee would continue in its current form but only until April 2023.  Hunt stated that it would not be “responsible” to continue exposing public finances to the volatile nature of global gas prices, and that the Treasury would conduct a review as to how best to proceed once the current support came to an end. The political consequences of this reversal should not be underappreciated. Truss’s flagship policy, the difference between her two-year price guarantee and the six-month plan put forward by Labour was just about all the Prime Minister had to throw at Keir Starmer during Prime Minister’s questions last week. Even that has now evaporated.

In total, the Treasury forecasts that the changes announced today will increase tax revenue by some £32bn over and above the position established by the mini-Budget. Hunt was clear that departments across Whitehall will nevertheless be expected to find savings, and that there will be difficult decisions ahead on both tax and spending.

FTI Consulting Analysis

So one-sided was the negotiation that swept Jeremy Hunt into 11 Downing Street on Friday that it took less than 96 hours for him to wrest complete responsibility for managing the UK economy from his nominal superior. In the course of just five minutes this morning, Hunt undid not only the vast majority of the fiscal decisions approved by his Prime Minister just a fortnight ago, but also shredded the economic ideology that formed the very basis for her being elevated to the job after barely 40 days in charge. As the only roll of the dice left for the beleaguered Prime Minister, it seems doubtful that she will have in any way dissented from Hunt’s plan. But the question as to whether he will be remembered as Truss’s saviour or her assassin is yet to be answered.

Hunt had already laid the groundwork for today’s accelerated fiscal intervention during interviews over the weekend, where he stated that he was “not taking anything off the table” when it came to tax and spending changes. The Treasury has indicated that the full medium-term fiscal plan will still be delivered on 31 October alongside the much-awaited forecast from the independent Office for Budget Responsibility.

Today’s reversals are intended to shore up markets until then, and follow on from Friday’s sacking of Kwasi Kwarteng, the £18bn U-turn on the planned cut to corporation tax and the conclusion of the Bank of England’s emergency gilt-buying scheme. This operation saw the Bank purchase some £17.8bn of government debt, to guard against a large-scale sell-off that would have put many pension funds at risk.

This morning’s statement was a clear attempt to offset “unhelpful speculation”¸ and temper the anxiety caused by the conclusion of the central bank’s support. Hunt was looking to demonstrate to those in the Square Mile that so-called ‘Trussonomics’ was not going to be pursued at all costs. In a further nod to stability, Sunday night saw Hunt brief Andrew Bailey, the Governor of the Bank of England, on the revised plans. Subsequently, the Treasury said that the meeting was part of wider conversations to ensure that “sustainable public finances underpin economic growth.”

When the markets opened this morning, Pound Sterling took a slightly stronger position at $1.13, and the interest rate on government bonds fell.  Both were signs of increased confidence in the prospect of changes to the Government’s fiscal agenda, and an early indication that Hunt’s more measured approach is welcome. There was encouragement, too, from the Director of the Institute for Fiscal Studies Paul Johnson, who welcomed the acceleration of the new measures saying there was “a need to get a grip on public finances” and go further than reversing some of the tax cuts announced in the mini-Budget.

Of course, this morning’s events raise more questions than they answer about Truss’s long-term prospects. Her position remains perilous with some of her own backbenchers openly discussing her impending demise. The media are also on the attack, with even the more right-leaning publications being scathing in their assessment of Truss’s actions and her future.

For many it is now a question of when, rather than if, the Prime Minister will be forced by her own Conservative colleagues to stand aside. Truss will of course hope that today’s announcement demonstrates that she, and her team, have listened and learned and result in the markets standing down from their war footing. Yet she has no established political credibility on which to fall back on. Thus, while the initial reaction from the City looks more positive than negative, many will conclude that this is despite, rather than because of Truss’s continued occupation of No.10.

The weekend inevitably saw renewed attacks from Labour. In a statement released on Sunday, Keir Starmer criticsied her press conference held last Friday, saying that is “completely failed to answer any questions the public had” ¸ and described the Conservative Party as the “biggest threat to the security and finances of families across the country.” That it is Hunt rather than Truss who now appears to be in charge of the country means that Starmer’s attacks will be unrelenting.

But forcing a Prime Minister from office is usually messy and always acrimonious. As the UK moves into a challenging winter period, Tory MPs are aware that conducting a six-week internal election period would deliver a repeat of the summer’s ‘zombie government’ and test their credibility with the electorate further than before. As such, a ‘coronation’ of a new leader seems the most likely outcome, although it would lead to accusations that the process is undemocratic and lend further credibility to Labour calls for an immediate general election in order to re-establish legitimacy.

Whoever fills Truss’s shoes will have to put Conservative Party unity at the heart of their agenda, and quickly demonstrate that they can get a firm hand on the economy by appointing a Cabinet that oozes stability and competence. Calling a General Election would be a huge gamble for the new incumbent, as polling suggests that the Conservatives would suffer a catastrophic defeat, but quick and decisive action is required to change the direction of, and narrative around the party. Labour’s lead in the polls continues to grow, and while Hunt may be more useful to Truss than some others around her it is hard to see how his interventions can prevent the inevitable from happening.