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Jeremy Hunt unveils £55bn fiscal squeeze as UK economic outlook darkens

The finance minister, Jeremy Hunt, weathered the financial “storm” hitting Britain on Thursday, announcing £55 billion in tax hikes and spending cuts aimed at restoring the country’s reputation and propping up its weak balance sheet.

Two months after Hunt’s predecessor, Kwasi Kwarteng, panicked the market with a ‘mini’ budget that included £45bn of unfunded tax cuts, the Chancellor’s Autumn Manifesto turned Tory economic policy on its head.

While Kwarteng announced the biggest tax-cutting plan for 50 years, Hunt has presided over the largest tax-raising effort for 30 years outside of the pandemic, leaving the country with the highest tax burden since World War II.

The chancellor told a dismal House of Commons that massive fiscal consolidation, including £30 billion in spending cuts and £25 billion in tax increases, is needed to restore Britain’s credibility and tame inflation.

The Office for Budget Responsibility said that by 2027-28 Britain will have a tax burden of 37.1 per cent of gross domestic product – one percentage point higher than the March forecast and the post-war record.

With the British economy sliding into recession, the Office for Budget Responsibility’s forecasts highlighted the challenge facing household and public finances, both of which will be affected by expected 2023 inflation of 7.4 per cent.

The economy is expected to contract by 1.4 per cent and is not expected to recover to pre-pandemic levels until the end of 2024.

Rising prices will erode real wages and reduce living standards in the sharpest decline in six decades, the balance sheet office said, down 7 percent over the two fiscal years to 2023-24. That would kill off the growth of the past eight years, despite more than £100 billion in extra government support.

The pound is down 1 percent today at $1.1788 per dollar after Hunt outlined the package, just below the level before the finance minister launched his statement. UK Government Bonds remained under moderate pressure, trading slightly lower on the day.

Much of the fiscal consolidation, including “hidden” increases in taxes and a major squeeze on public spending, is due to take place in the years after the general election expected in 2024. Rachel Reeves, a spokeswoman for the Labor Treasury, said the aim was as an electoral “trap” for her party.

But one of the biggest tax hikes – a freeze on national insurance thresholds for companies – will take effect from April 2023.

Hunt delighted Tory MPs by finding funds to cushion the over-inflationary health and social care system, providing an extra £5 billion a year, and a further £3 billion for schools over the next two financial years.

He also announced inflation-related increases for retirees and retirees, stressing that he would maintain a “triple pension lock”. “To be British,” he said, “is to be kind.”

Hunt said public spending would rise by just 1 per cent in real terms in the next parliament and capital spending in cash would be frozen, raising £21bn and £14bn respectively – the majority of the fiscal pressure. This could represent a significant reduction in capital expenditure plans.

The chancellor insisted that tax increases and spending cuts were needed because of an “international crisis” and downplayed the idea that any of the problems were home-grown. “It’s a recession in Russia, and a recovery in Britain,” he said.

But his statement was an admission that Britain’s dismal economic performance of late — hampered by the 2008 crash, the Covid-19 pandemic, the Ukraine war and Brexit — meant the country was living beyond its means.

Hunt told MPs that his Autumn Manifesto would ensure that Britain’s debt as a proportion of GDP would fall by the end of the five-year forecast given by the Balance Sheet Office, which was sidelined by Kwarteng.

Britain’s economy’s recovery from the depths of the pandemic has fallen far short of its competitors. Figures compiled by the Organization for Economic Co-operation and Development found that the UK economy was still 0.4 per cent smaller in the third quarter of this year compared to the last quarter of 2019; The eurozone was 2.1 per cent larger and the United States 4.2 per cent larger.

Andrew Bailey, the governor of the Bank of England, said on Wednesday that Brexit contributed to the UK’s economic weakness, although Hunt and Rishi Sunak, the prime minister, played it down.

Hunt told MPs that the global outlook is difficult. “We are not immune to these global headwinds,” he said. “But with this plan for stability, growth, and public services, we’ll weather the storm.”

The chancellor said his main goal was to help the Bank of England defeat inflation, which hit a 41-year high of 11.1 per cent in October.

“We need fiscal and monetary policy to work together,” he said.

The Chancellor insisted that his measures to raise taxes were fair: they included a reduction in the upper minimum tax rate of 45 per cent from £150,000 to £125,000; The burden of dividend taxes and capital gains tax will also rise. “We demand more from those who have more,” he said.

Businesses will also face a significant tax increase, notably through a freeze on the National Insurance Threshold for employer contributions, which will raise £5.8bn by 2028. A windfall tax on energy companies would raise £14bn next year.

Hunt confirmed that average energy bills will be set at £3,000 a year from next April for all, while the most vulnerable will receive special help to keep their bills.

Among the measures announced by Hunt was confirmation that EU rules governing the insurance sector, Solvency II, would be rewritten to unlock “tens of billions of pounds” of capital to be spent on infrastructure. The Sizewell C nuclear power plant will be built.

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