UK unveils recessionary budget marked by tax hikes, spending cuts

Britain’s Chancellor of the Exchequer Jeremy Hunt announced a series of tax hikes and tighter public spending in a budget plan on Thursday that he said was needed after former Prime Minister Liz Truss hit the country’s fiscal reputation.

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Outlining a £55bn plan – almost half from tax rises – to fix the public finances, Hunt said the economy was already in recession and will shrink next year as it struggles with inflation forecast to average 9.1% this year and 7.4% in 2023.

Britain’s budget watchdog said rising prices would further erode people’s wages and cut living standards by 7% by April 2024 – the year a national election is expected – wiping out growth in the eight years to 2022. Millions of Britons are already struggling with a cost of living crisis.

The tax burden would reach 37.1% of GDP, the highest sustained level since World War II, by the end of its five-year forecast period, the OBR said, up from 33.1% in the 2019-20 tax year.

But Hunt said he could not avoid painful fiscal medicine – although much of it will not kick in immediately – if Britain is to build on the recent restoration of calm in financial markets.

“Credibility cannot be taken for granted and yesterday’s inflation figures show that we must continue a relentless fight to bring it down, including an important commitment to rebuilding the public finances,” he told parliament.

UK inflation was 11.1% in October, a 41-year high. Sterling fell almost 1% against the dollar and 0.2% against the euro after Hunt spoke, as investors assessed the scale of belt-tightening, which looked more severe than anything planned by other major rich economies.

“There are still concerns about the long-term health of the UK economy, whether there will be enough of what (Hunt) says for long-term growth prospects,” said Susannah Streeter, senior market analyst at Hargreaves Lansdown.

Hunt announced changes that will see more people pay basic and higher income tax, lowering to £125,000 the threshold at which people pay the top 45% rates, as well as cutting tax-free allowances for dividend income.

He froze until 2028 a threshold at which employers start paying social security contributions, which will cost companies more.

A charge on energy companies’ profits on will rise to 35% from 25% from January 1 until 2028, and a new temporary tax of 45% will be imposed on electricity producers, to raise a total of £14 billion next year, Hunt said.

Government spending would grow more slowly than the economy but increase overall, he said.

A scaled-down version of the existing cap on energy costs would cost just under £13 billion next year, about half of what was planned by former finance minister Kwasi Kwarteng.

But pensions and welfare benefits would rise in line with inflation, a major cost to public finances after the sharp rise in prices this year.

Paul Johnson of the Institute for Fiscal Studies think tank said Britain would avoid major spending cuts over the next two years, with tax rises also limited in the short term, but that real pain would come after the likely 2024 election.

Recession now

Mr Hunt said forecasts from the independent Office for Budget Responsibility (OBR) outlined the “strong impact of global headwinds on the UK economy”.

Gross domestic product is now expected to decline by 1.4% next year compared to the forecast in March for growth of 1.8%. Since then, Britain’s economy has struggled with inflation, a slowing global economy and a period of financial market turmoil during Truss’s brief tenure as prime minister.

The OBR forecasts GDP growth of 1.3% in 2024 and 2.6% in 2025, compared with previous forecasts of 2.1% and 1.8% respectively. It sees inflation at 9.1% in 2022, up from the March forecast of 7.4%, and at 7.4% next year, up from 4.0%.

The opposition Labor Party said the Conservative Party had failed to learn from past attempts to fix public finances without a clear plan for economic growth.

“This government has forced our economy into a downward spiral where low growth leads to higher taxes, lower investment and depressed wages with the deterioration of public services, all of which is hitting economic growth again,” said Rachel Reeves, Labour’s finance policy spokeswoman. .

But Hunt and Sunak say their plan will restore investor confidence after Truss’ failed experiment with unfunded tax cuts, which cost her her premiership after just 50 days in Downing Street.

Her policies sent the pound to a record low against the US dollar, threatened chaos in the housing market and forced the Bank of England to intervene to support bond markets.

The only Group of Seven economy yet to recover to its pre-pandemic size, Britain had suffered a decade of near-stagnant income growth even before COVID hit.

Hunt warned before Thursday’s announcement that he could only slow a rise in borrowing costs by showing investors that Britain’s 2.45 trillion pound ($2.91 trillion) debt mountain will begin to fall as a share of GDP.

Thursday’s forecasts from the OBR showed that the target would be reached in the 2027/28 financial year.


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