Market Cheers UK Tax Cut Repeal... Truss Faces Deepening Short-Lived Crisis

[Image source=Yonhap News]

[Asia Economy Reporter Yujin Cho] Jeremy Hunt, the new UK Chancellor of the Exchequer, effectively scrapped Prime Minister Liz Truss's tax cut plan, which was welcomed by financial markets but deepened the risk of Truss's short tenure.

On the 17th (local time), the 30-year UK government bond yield fell by more than 0.40 percentage points to 4.37% annually in the bond market, and the pound rose as much as 2.2% against the dollar. The shaken major stock markets also rebounded. On the same day, the Dow Jones Industrial Average in New York closed at 31,185.82, up 1.86% from the previous session. The S&P 500 and Nasdaq indices also rose 2.65% and 3.43%, respectively.

European stock markets also closed higher across the board. The pan-European Stoxx 600 index surged 1.83%, while Germany's DAX and France's CAC 40 indices rose 1.70% and 1.83%, respectively.

In a video statement released that day, Chancellor Hunt announced the cancellation of the income tax rate cut and a reduction in energy bill support. He canceled the plan to bring forward the reduction of the basic income tax rate from 20% to 19% by one year and said it would be frozen indefinitely until economic conditions allow.

He also shortened universal energy bill support from two years to six months and said that from April next year, support would focus on vulnerable groups. The UK government had planned to cap energy bills for a standard household at ?2,500 (about 4 million KRW) annually for two years.

Plans to cut dividend tax rates, tourist tax exemptions, and freeze alcohol taxes were also reversed, but the already passed reductions in stamp duty and the cancellation of the increase in National Insurance contributions, which are equivalent to income tax, will proceed as scheduled.

Truss's flagship economic policy, which had already undergone two U-turns, was effectively scrapped, with the total canceled tax cut policies amounting to ?32 billion (about 32 trillion KRW) annually.

Chancellor Hunt appeared before Parliament that afternoon and promised to establish an economic advisory committee. He also refrained from confirming plans to increase defense spending to 3% of GDP and showed a progressive attitude toward imposing a wealth tax on energy companies that have made huge profits, indicating further changes to Truss's policy direction.

To stabilize financial markets, Chancellor Hunt announced part of the budget two weeks earlier than scheduled. Former Chancellor Kwasi Kwarteng had originally planned to release the budget along with the independent Office for Budget Responsibility (OBR)'s medium-term fiscal outlook on the 31st. The full budget and OBR medium-term fiscal outlook will be released as planned.

With the ambitious flagship economic policy announced as his inaugural act rendered futile, the risk of Truss's short tenure is intensifying.

UK media reported that Truss's growth pledge through tax cuts has been almost entirely scrapped, leaving her without justification to remain in office, and that Chancellor Hunt effectively appears to be the prime minister.

Pressure for Truss's resignation continues within the party. Earlier, the Daily Mail cited anonymous sources reporting that over 100 Conservative MPs were ready to send letters of no confidence and that Truss would be ousted later this week.

The number of Conservative MPs publicly demanding her resignation increased by two on the day, bringing the total to five.

Regarding this, Prime Minister Truss said on Twitter, "The British people want stability, and that is why we are taking measures to address the serious problems we face due to worsening economic conditions," adding, "We have taken steps to chart a new path for growth."

A spokesperson for the Prime Minister's Office said at a briefing that "the Prime Minister listened to opinions and made difficult decisions to stabilize the market," and that she had discussed this with the Chancellor over the past weekend.

This content was produced with the assistance of AI translation services.