London: Britain’s new Prime Minister Rishi Sunak on Wednesday delayed the announcement of a keenly awaited plan for repairing the country’s public finances until Nov. 17, two-and-a-half weeks later than previously planned.
The postponement, Sunak’s first policy decision since taking over from Liz Truss on Tuesday, briefly raised British borrowing costs in financial markets but there was no repeat of the panic bond selling caused by Truss’s September tax-cutting plan.
Sunak takes on an economy facing recession at a time when the Bank of England is raising interest rates to tame double-digit inflation. Low growth and rising borrowing costs have worsened the strain on already-stretched public finances.
The government is drawing up spending cuts and cancelling tax cuts just as the rising cost of mortgages, food, fuel and heating is squeezing many household budgets to their limits.
“I have been honest. We will have to take difficult decisions to restore economic stability and confidence,” Sunak told parliament, promising to protect the most vulnerable.
“The Chancellor (Jeremy Hunt) will set that out in an autumn statement in just a few weeks.”
Finance minister Hunt said more time was needed to ensure the new plan took into account new economic forecasts.
It is expected to set out how the government will plug a budget shortfall of as much as 40 billion pounds ($46 billion). Unlike Truss’s plan last month, it will be fully audited by Britain’s fiscal watchdog.
Asked to confirm the government’s commitment to an expensive inflation-pegged rise in retirement pensions, Sunak’s press secretary said she would not speculate ahead of Nov. 17.
His team gave the same answer on other potentially costly spending decisions on foreign aid, defence and welfare payments.
Credibility hit
Britain’s credibility in financial markets was shaken last month when Truss announced her unfunded tax cuts, triggering a bond market rout so severe the BoE had to intervene. Truss was forced into a U-turn and eventually resigned.
Hunt said he wanted to restore confidence “that the United Kingdom is a country that pays its way and for that reason, the medium-term fiscal plan is extremely important. The plan would show falling over the medium term, he added.
The budget plan delay will complicate the BoE’s job next week when it is due to publish forecasts for the economy without knowing the details of the government’s fiscal plans, as well as take its latest monetary policy decision.
The BoE is expected to raise interest rates again on Nov. 3, probably to 3.0% from 2.25% although investors increased their bets on a full percentage-point increase to a more than one-in-three chance after the announcement of the budget plan delay.
Hunt said he had discussed the decision to delay the fiscal statement with BoE Governor Andrew Bailey, and that Bailey had understood.
While finance minister during the COVID-19 pandemic, Sunak oversaw huge expenditure and borrowing to keep the economy going. He resigned in July in protest at then-prime minister Boris Johnson’s leadership and what he saw as a reluctance to take difficult decisions to pay the pandemic bill.
His appointment as Conservative Party leader was broadly welcomed by investors who see him and Hunt as more willing than Truss to tackle the hole in Britain’s public finances.
British government bond prices extended their losses on confirmation of the budget plan delay. Long-dated gilt yields hit new session highs as they rose 12-13 basis points before easing back and being little changed on the day.
Sterling was also little changed by the announcement.
Speaking earlier on Wednesday, International Monetary Fund chief Kristalina Georgieva told Reuters she expected Sunak to steer Britain towards fiscal sustainability and said he was right to warn of hard decisions ahead.
“I listened carefully to him talking to the British people, and this is a message that should resonate across the world. These are tough times, and tough times require tough decisions,” Georgieva said. –Reuters
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