- UK economy in recession expected to contract in 2024
- Nearly half of £55bn of belt-tightening due to tax hikes
- Budget watchdog sees 7% drop in living standards
- IFS think tank says most of the hit to come after 2024
- The pound falls almost 1% against the dollar
LONDON, Nov 17 (Reuters) – Britain’s Finance Minister Jeremy Hunt on Thursday announced a series of tax hikes and government spending cuts in a budget plan he said was needed after the hit to the the country’s fiscal reputation by former Prime Minister Liz Truss.
Outlining a £55billion plan – nearly half of tax hikes – to fix public finances, Hunt said the economy was already in recession and set to contract next year as it struggles with inflation expected to average 9.1% this year and 7.4% in 2023.
Britain’s budget watchdog said rising prices will further erode people’s wages and cut living standards by 7% by April 2024 – the year a national election is due – wiping out growth over eight years to 2022. Millions of Britons are already struggling with the cost of a living crisis.
The tax burden would reach 37.1% of GDP, its highest level since World War II, at the end of its five-year forecast period, the OBR said, up from 33.1% in the year to come. taxation 2019-2020.
But Hunt said he couldn’t avoid painful fiscal medicine – although much of it won’t kick in immediately – if Britain is to build on the recent return to 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 a major commitment to rebuild public finances,” he said. declared to Parliament.
UK inflation was 11.1% in October, a 41-year high.
The pound was down almost 1% against the dollar and 0.2% against the euro after Hunt’s speech, as investors assessed the extent of the belt tightening, which seemed more harsher than anything expected by other large, wealthy economies.
“There are still concerns about the long-term health of the UK economy, whether there will be enough in what (Hunt) is saying for the longer-term growth outlook,” said analyst Susannah Streeter. Senior Markets at Hargreaves Lansdown.
Hunt announced changes which will mean more people will pay basic and higher rate income tax, and lowered the threshold at which people pay the top rate of 45 per cent to 125,000 pounds, as well as the reduction of non-taxable allowances for dividend income.
It has frozen until 2028 a threshold from which employers start paying social security contributions, which will cost companies more.
A levy on energy company profits will rise from 25% to 35% from January 1 to 2028, and a new temporary 45% levy will be imposed on power producers, to raise a total of £14bn next year , Hunt said. .
Government spending would grow more slowly than the economy, but grow overall, he said.
A reduced version of the current energy cost cap would cost just under £13billion next year, around half of what was forecast by former finance minister Kwasi Kwarteng.
But pensions and social benefits would rise in line with inflation, a major expense for public finances after soaring prices this year.
Paul Johnson of the Institute for Fiscal Studies think tank said Britain would be spared deep spending cuts over the next two years, with tax increases also limited in the short term, but that the real pain would come after the likely 2024 elections.
Hunt said the forecast from the Independent Office for Budget Responsibility (OBR) exposed “glaringly the impact of global headwinds on the UK economy”.
He now expects gross domestic product to contract 1.4% next year from his March projection of 1.8% growth. Since then, Britain’s economy has struggled with inflation, a slowing global economy and a period of turmoil in financial markets during Truss’ brief tenure as prime minister.
The OBR forecasts GDP growth of 1.3% in 2024 and 2.6% in 2025, against previous forecasts of 2.1% and 1.8% respectively. It expects inflation to be 9.1% in 2022, up from its March forecast of 7.4%, and 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 has pushed our economy into a catastrophic loop where low growth leads to higher taxes, lower investment and squeezing wages with cuts in public services, all of which hit economic growth again,” the agency said. Opposition Labor Party spokeswoman Rachel Reeves. .
But Hunt and Sunak say their plan will restore investor confidence after Truss’ failed experiment with unfunded tax cuts cost him his premiership after just 50 days in Downing Street.
His policy sent the pound to a historic 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 regain its pre-pandemic size, Britain had experienced a decade of near-stagnant income growth even before COVID hit.
Hunt had warned ahead of Thursday’s announcement that he could only slow rising borrowing costs by showing investors that Britain’s 2.45 trillion pound ($2.91 trillion) debt mountain would start to decline as a percentage of GDP.
Thursday’s forecast from the OBR showed the target would be met in the 2027/28 financial year.
(This story has been corrected to fix the inflation estimate and year 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
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