Liz Truss appoints Jeremy Hunt as UK's new Chancellor after Kwasi Kwarteng's resignation

Jeremy Hunt has been appointed UK’s new chancellor to the exchequer. The former chancellor was sacked as Liz Truss reportedly faces immense pressure from Tory backbenchers over the state UK’s economy is in, due to her government’s unfunded tax-cuts. British media is reporting that Truss will now do a volte face on the tax-cuts to save her prime ministership, as many Tory MPs are considering replacing Truss with Sunak. 

Liz Truss won the Tory party leadership contest on September because her opponent Rishi Sunak stated that the tax cuts will lead to economic turmoil, as per reports from the Times of London. As talks about Tory members considering replacing Truss spread, as per reports from Telegraph, Truss decided that she needs to fire her chancellor to the exchequer, Kwasi Kwarteng. Kwarteng served as the chancellor for merely 6 weeks. 

Tax cuts leds to chaos in financial markets

Before being appointed as the Prime Minister, during the leadership debates with Rishi Sunak, Liz Truss had sold the tax cuts to corporations as her core policy goal. Sunak expressed disagreement, stating that tax cuts to corporations in this environment was ‘fairy tale economics’. He added that cutting corporation tax doesn’t lead to more investments. The companies merely use that money for stock buybacks. 

Truss expected that cuts in the corporation tax will lead to more investment. As soon as the mini budget was announced, UK’s financial markets witnessed chaos and as per reports from The Economist, a capital flight out of UK’s financial markets. The International Monetary Fund, which doesn’t criticise OECD nations, went ahead and criticised Truss’ mini-budget and urged her government to reverse the decision. The central bank of UK, the Bank of England, stepped in to reduce the chaos in financial markets. Bank of England began buying government bonds as a part of emergency measures, to prevent collapse of pension funds. 

Pension funds almost collapsed 

Pension funds are managed by fund managers with the explicit goal of ensuring payouts to pensioners. The goal of fund managers is ensuring they earn enough money to make these payouts to pensioners. Fund managers rely on buying long dated bonds to achieve this goal. To hedge against these purchases, derivatives are bought. 

To buy derivatives, fund managers need to offer collateral. When bond yields witness sharp spikes in price, the amount of collateral fund managers need to offer goes up, for which fund managers in UK started selling their assets. The Financial Times report mentions that to provide fund managers with some time, the Bank of England started buying bonds. A letter written by the Bank of England to UK Parliament’s Treasury Committee stated that if the central bank hadn’t intervened then several pension funds would have defaulted. The Labour Party has called for a general election as they believe that firing Kwasi Kwarteng and appointing Jeremy Hunt as the new chancellor is not enough, as per reports from The Guardian. Jeremy Hunt had earlier contested against Boris Johnson in the Tory leadership race, in which Boris Johnson had won to become the leader of Tory party.