Jeremy Hunt raises taxes, spends to restore market faith in Britain

  • The UK economy is in recession, set to shrink in 2024
  • Almost half of the 55 billion pounds of belt-tightening from tax increases
  • Budget watchers see a 7% hit to living standards
  • The IFS think-tank says many hits will come after 2024
  • Sterling falls almost 1% against the dollar

LONDON, Nov 17 (Reuters) – Britain’s finance minister Jeremy Hunt announced a string of tax increases and tighter public spending in a budget plan on Thursday that he said was necessary after the blow dealt to the country’s fiscal reputation by former prime minister Liz Truss.

Outlining a plan of 55 billion pounds – almost half of the tax increase – to fix public finances, Hunt said the economy is already in recession and is set to 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 price rises would further erode people’s wages and reduce living standards by 7% by April 2024 – the year of an expected national election – eliminating growth for the eight years to 2022. Millions of Britons are already struggling with costs. life crisis

The tax burden will hit 37.1% of GDP, the highest sustained level since the Second World War, 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 many did not kick in immediately – if the UK was to build a restoration of calm in financial markets.

“Credibility is unacceptable and yesterday’s inflation figures show that we must continue our relentless fight to bring it down, including an important commitment to rebuild public finances,” he told parliament.

UK inflation was 11.1% in October, a 41-year high.

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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 looks more severe than any planned by other large rich economies.

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

Hunt announced changes which will mean more people pay basic and top rate income tax, and lower the £125,000 threshold at which people pay the top 45% rate, as well as reducing the tax-free allowance for income from dividends.

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

Energy company profits will rise to 35% from 25% from January 1 until 2028, and a new temporary tax of 45% will be imposed on electricity generators, to raise a total of 14 billion pounds next year, Hunt said. .

Public spending will grow more slowly than the economy but rise overall, he said.

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

But pensions and welfare benefits will rise in line with inflation, a major cost to public finances after this year’s price hike.

Paul Johnson from the Institute for Fiscal Studies think tank said that Britain will avoid big spending cuts in the next two years, with tax increases in the short term, but the real pain will come after the 2024 election.

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CURRENT RECESSION

Hunt said the forecast from the independent Office for Budget Responsibility (OBR) laid out the “starkly impact of global headwinds on the UK economy”.

It now expects gross domestic product to contract by 1.4% next year compared to its March forecast of 1.8% growth. Since then, the British economy has struggled with inflation, a slowing global economy and a bout of financial market turmoil during Truss’s brief term 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 its 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 the lessons of past attempts to fix public finances without a clear plan for economic growth.

“This government is forcing our economy into a doom-loop where low growth leads to high taxes, low investment and squeezed wages and running low on public services, all of which hits economic growth again,” said opposition Labor Party finance spokeswoman Rachel Reeves. .

But Hunt and Sunak said the plan would restore investor confidence after Truss’s failed experiment with unfunded tax cuts, which cost him his prime after 50 days in Downing Street.

His policy sent the pound to an all-time low against the US dollar, threatened chaos in the housing market and forced the Bank of England to intervene to prop up the bond market.

The only Group of Seven economy to have recovered its pre-pandemic size, the UK had experienced a decade of near-stagnant income growth even before COVID struck.

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

Thursday’s forecast by the OBR suggests the target will be met in the 2027/28 financial year.

(This story has been corrected to fix estimates and years of inflation in the second paragraph)

Additional reporting by Kylie MacLellan, Sarah Young, James Davey, Muvija M, Suban Abdulla, Farouq Suleiman, Elizabeth Piper, Alistair Smout, Andrew MacAskill; Graphics by Vincent Flasseur; Written by William Schomberg; Editing by Catherine Evans

Our standards: Thomson Reuters Trust Principles.

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