“No government can control markets,” said Jeremy Hunt this morning. But some markets can control governments, eh Jeremy?
He owes his job as troubleshooting chancellor to hard-nosed gilts investors. They have just pushed him into limiting the government’s plan to subsidise household energy bills. This comes on top of scrapping the bulk of tax cuts in the disastrous “mini” Budget of predecessor Kwasi Kwarteng.
Hunt bets his fiscal prudence will tighten gilt yields sufficiently to help shrink the £60bn annual hole in the government’s budget projected by the Institute for Fiscal Studies for 2026-27. He has crowdsourced his policy direction to the 10-year and 30-year gilt yields, rather than focus groups.
It could earn Hunt the job of prime minister, which Liz “busted flush” Truss is expected to vacate. Price moves have been approving so far. Yields for both maturities tightened more than 40 basis points, around 8 per cent, between Friday’s close and Monday lunchtime.
The maths of the government’s U-turn on tax cuts are simple. These should save about £32bn from an eventual projected cost of some £45bn, Hunt says.
The calculation is more complicated when it comes to Hunt’s curbs on the energy support scheme. The centrepiece of this was a price cap worth around £2,500 to the average household. The cost, estimated at about £150bn over two years, is highly sensitive to energy prices.
In recent weeks, forward natural gas prices have fallen in response to a weakening world economy. This has reduced the estimated cost of the scheme to some £120bn. Hunt said a universal scheme would now cover only this winter, with a review in the spring. The government would probably avoid covering the bills of better-off households during the winter of 2023, says Simon French of Panmure Gordon. That would save around £30bn.
But you cannot knock that saving off the fiscal hole forecast by the IFS on a three-year perspective, French points out. What matters here are the interdependent factors of extra borrowing, gilt rates, Bank of England base rates and inflation. If the government can borrow less — which requires less spending — it can pay less to borrow.
Hunt, now in pole position among prime ministerial hopefuls, must maintain his uneasy alliance with gilts investors. Yields will need to rise in parallel with base rates. But provided there are no wild swings, that should be fine. Primary responsibility for sovereign bond market stability resides with governments rather than central banks, as recent events have shown.
It is one thing to become leader of your country by popular acclaim. It is another to be anointed — however indirectly — by such kingmakers as Essex gilts traders and sovereign wealth fund managers in the Gulf. But that is the trick Hunt may be in the process of accomplishing.