Hunt sacrifices Trusseconomics

Hunt sacrifices Trusseconomics to placate the angry gods of the bond markets…writes Jason Hollands

A quick comment on this morning’s announcement by Jeremy Hunt:

“After recent u-turns over the abolition the 45p tax band and the halting corporation tax rises, the new Chancellor of Exchequer Jeremy Hunt has this morning comprehensively ripped-up the Prime Minister’s fiscal policy in a concerted effort to placate the angry gods of the bond markets and retore the UK Government’s battered credibility for fiscal discipline.

“Alongside the comprehensive ditching of Liz Truss’s tax cutting agenda, with the exception of the National Insurance cut, the energy price guarantee has been massively carved back in scale with the existing commitment only running until next April. The Chancellor also warned that further difficult decisions lay ahead and that some areas of spending would need to be cut.

“These measures – which bring an abrupt end to the Truss economic experiment – have helped to placate debt markets with gilt yields falling back today. But with interest rates continuing to rise across the globe in the battle to tame inflation and the Bank of England set to commence Quantitative Tightening at the end of the month, involving the sale of gilts held on its balance sheet, the days of ultra-low borrowing costs of the last decade are well and truly behind us.

“With real incomes being squeezed, much higher business taxes now coming next year and the burden of personal taxes set to rise as allowances are frozen too, the growth outlook for the UK remains very challenging in the near term with a recession on the way.

“For investors, this represents a real headwind for UK domestically facing equities which tend to be found in the mid-cap and smaller companies parts of the market. A much safer place for investors to be now is to focus on the highly international, large companies of the FTSE 100 which earn around three quarters of their revenues overseas and especially defensive sectors like consumer staples and healthcare, as well as energy.”

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