Chancellor of the Exchequer Jeremy Hunt ripped up what was left of Prime Minister Liz Truss’s controversial economic program, scrapping tax cuts and removing support for household energy bills in an effort to restore order to the U.K. public finances.

After the backlash against Truss’s plan pushed up borrowing costs for the U.K. government, the package of £32 billion (US$36 billion) is less than half of what economists say the government may need to put government debt on a stable trajectory after soaring inflation and sputtering growth gutted tax revenue. 

Together with earlier U-turns, the decisions reverse almost all of the £45 billion in tax cuts and giveaways Truss announced in September, raising questions about whether she can survive in office. The only major changes left from that announcement are those that are already part way through legislation, on national insurance contributions and stamp duty. Hunt signaled he’s likely to make more severe spending cuts in the weeks ahead.

“There will be more difficult decisions, I’m afraid, on both tax and spending as we deliver our commitment to get debt falling as a share of the economy over the medium term,” Hunt said, adding that the priority will be on protecting “the most vulnerable.”

U.K. government bonds and the pound surged, with the yield on 30-year gilts falling as much as 44 basis points at one point. The would be second biggest daily drop on record if the debt were to close at that level.

Truss’s energy support scheme has also been curtailed. The current price freeze, capping the average bill at £2,500 a year for two years, will be reviewed in April, when it will be redesigned so that it’s more targeted at vulnerable households and will “better incentivize energy efficiency.”

Hunt will give further details to the House of Commons at 3:30 p.m. in London on Monday. He also intends to deliver a full fiscal plan on Oct. 31.

The chancellor’s announcement caught Truss’s team off guard, in a clear sign of how power and authority has drained away from the prime minister’s office. 

On Sunday afternoon, No. 10 was telling reporters that the prime minster would hold a cabinet reception on Monday evening to get their input on the chancellor’s proposals, before the Treasury decided it had to move more quickly. 

Even basic operational arrangements show who is now in control. No. 10 was initially unable to confirm whether the usual Monday morning press briefing for reporters would take place before checking in with Hunt’s team.

Truss is still due to have dinner with her cabinet on Monday and at 6 p.m. she will meet with the One-Nation Caucus. That’s the grouping of moderate Tory MPs which is seen as her biggest threat. Some MPs have called publicly for her ouster and many more are plotting behind the scenes.

What Bloomberg Economics Says...

“Taking into account the latest moves in gilt yields, we estimate this measure gets only part of the way to putting debt back on a sustainable track. 

The U.K.’s standing in markets may have been permanently harmed, and Bank of England Governor Andrew Bailey has indicated that interest rates will need to stay higher than previously expected.”

--Jamie Rush, Bloomberg Economics.

Hunt’s statement this morning included:

  • maintaining the basic rate of income tax at 20 per cent indefinitely instead of reducing it as planned, saving £5 billion
  • scrapping planned cuts in dividend taxes, saving £1 billion
  • maintaining alcohol duties instead of making cuts
  • The current price freeze, capping the average bill at £2,500 a year, will be reviewed in April, when it will be redesigned so that it’s more targeted
  • reinstating rules on contract workers, saving £2 billion
  • removing a tax-free shopping break at a savings of £2 billion