Jeremy Hunt bins disastrous mini-budget and announces changes to energy bill support

Watch: Jeremy Hunt reverses most tax cuts to tackle economic instability

Jeremy Hunt has delivered sweeping changes to the government's tax plans in his first act as chancellor in an attempt to get the public finances back on track and stabilise financial markets after weeks of turmoil.

The new chancellor of the exchequer on Monday made an emergency statement on the government's medium-term fiscal plan following talks over the weekend with prime minister Liz Truss.

Hunt, who took over from Kwasi Kwarteng after he was sacked by Truss, said he will reverse almost all the tax cuts announced in the mini-budget, ripping apart Truss's £43bn tax-cutting agenda.

"We will reverse almost all the tax measures that were in the growth plan," he said in a televised address. "At a time when markets are rightly demanding a commitment to sustainable finances it is not right to borrow to fund this."

The major U-turns will raise £32bn annually. All tax cuts announced in the mini-budget have now been reversed apart from a £13bn cut to national insurance and £1.5bn in stamp duty changes.

He said he will continue with the decision to reverse the increase in national insurance contributions from 6 November and a reduction in stamp duty, which are already going through parliament.

Hunt announced a new economic advisory council as he addressed MPs in a statement to the House Of Commons later in the afternoon ahead of the publication of his full plan on 31 October alongside forecasts from the Office for Budget Responsibility.

The body, which consists of four members, will assist him with his now role as chancellor and provide "more independent expert advice" to the government, Hunt said.

The council includes Rupert Harrison, who was a top aide to former chancellor George Osborne, Gertjan Vlieghe and Sushil Wadhwani, who both served on the Bank of England’s Monetary Policy Committee, and Karen Ward, chief market strategist for EMEA at JP Morgan Asset Management.

The chancellor said a lack of an OBR forecast is partly to blame for market turbulence following the mini-budget announced in September.

Read more: Pound rises as Jeremy Hunt scraps mini-budget tax cuts

UK chancellor of the exchequer Jeremy Hunt. Photo: Chris J Ratcliffe/Getty
UK chancellor of the exchequer Jeremy Hunt. Photo: Chris J Ratcliffe/Getty

Income tax reduction

The chancellor announced the government will scrap plans to reduce the basic rate of income tax from 20% to 19% in April next year, netting the Treasury an extra £6bn per year.

The rate had been due to reduce to 19p this Spring under Kwasi Kwarteng’s mini-budget, a year earlier than Rishi Sunak had planned.

Taxes are set to rise to their highest level since 1950, experts have said, after Hunt scrapped planned cuts in one of the biggest fiscal U-turns in British history.

"This is now very clearly a tax-raising parliament, with the tax take set to reach highs not sustained since 1950, Torsten Bell, chief executive of the Resolution Foundation said.

The group said that the government had "promised to reduce taxes, [but] is now setting taxes on course to rise as a share of GDP to around 36% by the end of the parliament — up from 33% at the start".

Energy bills support

Additionally help with energy bills for all households will only last until April, with Hunt announcing a review to look at a "new approach" to target support at those worst off after that.

Under the previous plan, bills for around 28 million households were due to be frozen at £2,500 for the next two years from October. However, the chancellor said the Treasury will review how the energy support package works, and expects it to be more targeted after next April.

"The biggest single expense in the growth plan was the energy price guarantee," he said. "This is a landmark policy supporting millions of people through a difficult winter and today I want to confirm that the support we are providing between now and April next year will not change."

"But beyond that, the prime minister and I have agreed it would not be responsible to continue exposing public finances to unlimited volatility in international gas prices."

Hunt also said that support for businesses will be "targeted to those most affected", adding that the new approach will "better incentivise energy efficiency".

The total package consisted of a six-month support scheme for businesses costing an estimated £29bn, and the two-year price cap for households would cost taxpayers around £120bn.

Other U-turns

Hunt said that he will reverse plans to cut dividend taxes and make payroll reforms introduced in 2017 and 2021.

The Treasury department is also is reversing changes to the IR35 contractors' off-payroll tax rules. That means that reforms to the off-payroll working rules known as IR35 from April 2023 will no longer take place.

He will also ditch plans for new VAT-free shopping for international tourists, as well as a freeze in alcohol duty — both announced by Kwarteng in the mini-budget less than a month ago.

What else has happened?

Since the mini-budget on 23 September, the prime minister has been forced to perform a series of U-turns, which has seen her abandon two major planks that stood at the heart of her economic plans.

On Friday she announced that corporation tax would in fact rise to 25% from April next year, instead of keeping it at 19%, reversing back to plans originally mooted by Tory leadership rival Rishi Sunak.

The government had already backtracked on plans to abolish the 45p tax rate for the highest earners earlier this month.

Watch: Jeremy Hunt rips up mini-budget plans on tax and energy

It comes as Truss's premiership is looking increasingly in peril as members of her Conservative party lose faith and called for her to go. And Hunt's statement sounded the final death knell for her free market manifesto— dubbed "Trussonomics" — to kick-start economic growth through a programme of swinging tax cuts and radical de-regulation.

But markets seem prepared to give Hunt the chance to turn back the clock, Danni Hewson, financial analyst at AJ Bell said.

She added: "Sterling is up, gilt yields have fallen sharply, and London’s indices are on the front foot. The new chancellor has bought the government some breathing space and this morning’s market reaction will have sent a clear message to both the PM and her detractors that 'Trussonomics' should never have been seriously considered, at least not whilst the economy is taking such a beating."

"But markets are fickle and two weeks is a long time in economics as in politics. It’s a pretty easy and obvious step to reverse most of those unfunded tax cuts announced in the mini-budget but it’s less straightforward to move the debate along.

"And that’s where the real risk lies, austerity might not be palatable, but it seems to be on the table. Mr Hunt now needs to find a way to make that policy palatable to a country already feeling the squeeze from their own budgetary issues."

Read more: FTSE 100 higher as Liz Truss fights for survival as prime minister

Since being appointed on Friday, Hunt has pledged to win back Britain's economic credibility by fully accounting for the government's tax and spending plans.

Over the weekend he warned that taxes will have to rise and public spending will be squeezed to address the black hole in the public finances opened up by the government’s £45bn mini-budget tax giveaway.

Economists estimated the government was facing a £60bn blackhole in the public finances, and experts have said that the gap meant there "wasn’t room for £40-odd billion of tax cuts".

Paul Johnson, the director of the Institute for Fiscal Studies think tank, speaking about the gap between government expenditure and revenue, told BBC Radio Four's Today Programme: "We thought the answer was around £60bn when we did the sums a couple of weeks ago, and according to the press over the weekend the OBR broadly agrees; thinks it’s probably around £70bn.

"These are numbers with a lot of uncertainty attached, because this is about the future, about where the public finances might be in four or five years’ time. But the big picture clearly is, there wasn’t room for £40-odd billion of tax cuts, and as we’ve seen there was a need to get a grip on public finances and probably do something even more than reversing those tax cuts."

Watch: Jeremy Hunt: We are going to have to take very difficult decisions