Credibility can affect fiscal policy as well. prime minister, the U.K. has seen a return of fiscal The market response to the United Kingdom’s orthodoxy. Tax rises and spending cuts worth “mini-budget” was swift and harsh (Figure I-9), a 2.5% of GDP over the next five years have placated clear signal that the proposed tax and spending markets. The U.K. fiscal watchdog—the Office for changes negatively affected the perceived Budget Responsibility (OBR)—has affirmed that willingness and ability of the U.K. government the latest fiscal plans put public sector net debt to service its debts. This should serve as a stark to GDP on a sustainable path. Gilt yields have reminder that markets will not tolerate unfunded returned to levels seen prior to the mini-budget, expenditures (tax cuts or spending increases) and the sterling has recovered against the dollar beyond a certain level. Following the appointment and euro. of Jeremy Hunt as chancellor and Rishi Sunak as FIGURE I-9 U.K. gilt yields have declined to pre-mini-budget levels Mini- Bank o ngand unt Sunak appointed budget interene -turn a prime miniter .% . d . l e i Y . -­ear git . -­ear git . -­ear git September  October  October  October October  Notes: Intraday data from September 22, 2022, to October 27, 2022. “Mini-budget” refers to the growth plan announced by Chancellor of the Exchequer Kwasi Kwarteng on September 23, 2022. The Bank of England intervened on September 28 to restore financial stability, announcing it would buy an unlimited amount of long-term gilts. On October 17, new Chancellor of the Exchequer Jeremy Hunt reversed almost all the measures of the mini-budget. On October 24, Rishi Sunak was announced as the new U.K. prime minister. Source: Bloomberg, as of October 31, 2022. 14