British budget: Britain brings back austerity. This is the reason

Business CNN

The last time the UK finance minister revealed his tax and spending plans, the market is chaotic and finally the prime minister of our country lost his job. The new government is not looking for a repeat performance.

On Thursday, Chancellor Jeremy Hunt will launch a budget aimed at restoring confidence in Britain’s ability to manage its public finances. But that may be easier said than done.

This country is looking down a barrel grueling recessionand investors remain on edge as interest rates go up. It required Hunt, who had claimed that England faced with a “very difficult” pull off a delicate balancing act.

Media reports suggest the government is looking to generate between £50 billion ($59 billion) and £60 billion ($70 billion) through a mix of tax increases and spending cuts, much of which cannot be used until after the next election. in 2024.

“If you do too much, too soon, you risk worsening the recession,” said Ben Zaranko, a senior research economist at the Institute for Fiscal Studies. “If you delay everything until the next general election, you risk not being seen as credible.”

A new wave of austerity could help restore the government’s reputation and financial markets after the budget from former Prime Minister Liz Truss – which featured an unusual combination of major tax cuts and ramped-up borrowing – unleashed panic.

But it will do little to ease fears about the country’s bleak economic prospects. Great Britain is one of the two G7 economies have contracted in the third quarter. It is now smaller than before the coronavirus pandemic. The Bank of England is forecast a long recession, which could last until 2024.

New cuts can make things difficult. When the government adopted an austerity program in 2010 on the heels of the Great Recession, it shaved off 1% of our country’s GDP, according to the British budget watchdog. Just four years ago, former Prime Minister Theresa May promised to bring almost a decade of austerity to a close.

Now, tax increases can further depress consumer confidence – already near record low – and spending cuts risk putting further strain on public services that are already buckling under great pressure.

Still, Hunt intends to show he has a plan to reduce government debt as a proportion of GDP in the medium term. It now stands at 98%. The Office for Budget Responsibility said in July that it could reach nearly 320% in 50 years.

“We’ve got to do some tax increases, do some spending cuts, if we’re going to show that we’re a paying country,” Hunt told Sky News on Sunday.

How did England get here? There is no shortage of fingers.

Part of the problem is global in nature. Interest rates have risen rapidly around the world as central banks try to rein in inflation. That pushed up borrowing costs for the government, causing a shock after years where money was cheap.

At the same time, skyrocketing energy costs, exacerbated by Russia’s war in Ukraine, have forced the government to step in to eliminate crippling energy bills — not long after they spent huge sums helping households and businesses through the pandemic.

Hunt has scrapped plans to cap the energy bill for a typical household at £2,500 ($2,981) for the next two years. Instead, support will only be guaranteed until next spring. But the size will still prove expensive.

Governments cannot blame all their problems on the rest of the world.

“You can just look at how the UK is performing relative to every other country in Europe, and there’s obviously a UK-specific element to this,” Zaranko said.

Exit the United Kingdom from the European Union has weighed in trade and worsen the shortage of workers in key industries. It also contributed to the devaluation of the pound – down around 20% against the US dollar since the Brexit vote in 2016 – it helped fuel inflation by pushing up import prices.

“The UK economy as a whole has been permanently damaged by Brexit,” said former Bank of England official Michael Saunders told Bloomberg TV this week. “If we hadn’t had Brexit, we probably wouldn’t be talking about an austerity budget this week. The need for tax rises, spending cuts wouldn’t be there.

While inflation in the United States cooled more than expected in October, falling to 7.7%, it is still rising sharply in Great Britain, reaching a 41 years old above 11.1% last month.

It is bolstering expectations that the Bank of England will need to keep raising interest rates and can hold them higher for longer, although the recession may complicate their forecasts.

The country’s labor market also remains extremely tight, with employment rates lower than before the coronavirus hit and a record number of people out of work due to long-term illnesses.

“Britain really knows that labor supply is constrained, perhaps more than in other countries,” said Ruth Gregory, senior UK economist at Capital Economics.

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