LONDON—The U.K.’s new chancellor, Jeremy Hunt, effectively scrapped Prime Minister Liz Truss’s signature tax-cutting plan, saying on Saturday that some levies would have to rise and public-spending cuts would need to be made to restore market confidence in the British economy.
Mr. Hunt said that Ms. Truss had made mistakes with her plan to boost growth by borrowing money to fund the biggest tax cuts since the 1970s, measures that spooked the markets and sent the Conservative Party crashing in the polls.
“Some taxes will not be cut as quickly as people want, and some taxes will go up. So it’s going to be difficult,” he told the BBC.
“What doesn’t work is to fund tax cuts by increasing borrowing and debt. They have to be tax cuts that people can see that you can afford to keep funding, year in and year out,” he said.
Mr. Hunt didn’t rule out a reversal of another key element of his predecessor’s legacy, a planned cut in the lowest rate of income tax. And he also promised moves to limit spending. “Spending will not go up as much as people want, and there’ll be more efficiencies to find and we won’t have the speed of tax cuts we’re hoping for,” he said, adding that he had yet to fully define which taxes would go up and what cuts would be made.
Mr. Hunt will outline his fiscal plan on Oct. 31 and has asked government departments to suggest cuts in the meantime. The new chancellor said he was given a clean slate by Ms. Truss after she fired her previous chancellor, Kwasi Kwarteng, on Friday, and that there “were difficult decisions ahead.”
The end of Ms. Truss’s experiment in British Reaganomics raises questions over her political future. Conservative lawmakers are panicking about their electoral prospects, and Ms. Truss has struggled to convince them that she has what it takes to pull the party back from a large deficit in the polls. Mr. Hunt argued that the country needed stability and that Ms. Truss should be judged in an election in 18 months’ time. “She has listened,” he said.
Mr. Hunt’s intervention was aimed at calming markets that offered a lukewarm reaction to Ms. Truss’s attempt on Friday to partially roll back her plan. While investors largely welcomed Mr. Kwarteng’s departure and an initial decision to shelve about half of the government’s tax-cut plans, there was still uncertainty over how the remaining half of the proposed cuts would be funded. The Institute for Fiscal Studies, a think tank, estimates that the tax-cutting plan would have required 60 billion pounds, or about $67 billion, of spending cuts to fund. In a sign of continuing market nervousness, yields on government debt rose after Ms. Truss’s U-turn announcement Friday.
The decision to start again is an attempt to draw a line under the saga. “It was wrong to fly blind,” said Mr. Hunt, referring to the government decision early in the Truss administration to not publish an independent budget analysis alongside the proposed tax and spending plans. He added that things “were in the process of being put right.” Mr. Hunt said that he could bring stability in the public finances and show that the U.K. could balance its books.
Since the plan to cut taxes to bolster economic growth was announced just over three weeks ago—alongside major new subsidies to cap prices of energy—the pound has sagged to a record low against the dollar, the Bank of England has intervened to buy government bonds to prevent the market selloff from morphing into a financial crisis, and the Conservative Party has tanked to record lows in opinion polls.
U.K. Prime Minister Liz Truss at a press conference on Friday announced the reversal of another pillar of her tax plans.
Photo: Daniel Leal/Zuma Press
The plan earned a rare rebuke from the International Monetary Fund, which warned that the tax cuts were likely to boost inflation at a time when the Bank of England was raising interest rates to contain surging consumer prices. But there are signs that paths taken by the government and the central bank are now converging again.
BOE Gov. Andrew Bailey on Saturday welcomed the government’s decision to press ahead with an increase in the tax rate on company profits, and said he had spoken with Mr. Hunt after his appointment Friday.
“I can tell you that there was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that,” he said while answering questions after a speech in Washington, D.C..
The IMF on Friday said it would wait until Mr. Hunt outlines his medium-term plan before making a judgment on whether the government had corrected its mistakes.
Ms. Truss has the lowest level of satisfaction among the public ever recorded for a British prime minister, according to polling firm Ipsos, with just 16% of people saying they were satisfied.
Write to Max Colchester at max.colchester@wsj.com and Paul Hannon at paul.hannon@wsj.com
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