LONDON (Reuters) – The country’s budget experts have warned that Britain is facing a record drop in living standards this year as incomes are eroded by rising inflation, after Finance Minister Jeremy Hunt announced more pain with now tax hikes and spending cuts.
In an effort to restore Britain’s fiscal reputation after the havoc caused by former prime minister Liz Truss’ plans for sweeping tax cuts, Hunt outlined a budget plan on Thursday to provide £55 billion a year to overhaul public finances.
Nearly half of the belt-tightening is due to come from the tax hike, prompting some protests from within Prime Minister Rishi Sunak’s ruling Conservative Party, which faces a national election in two years’ time.
Already struggling to adjust to life outside the European Union, the British economy was suffering from high inflation and a slowing global economy even before Truss caused turmoil in the financial markets. It is the only G7 economy that has not recovered to its pre-coronavirus size, and income growth was nearly stagnant for a decade before the pandemic.
The Office for Budget Responsibility said household disposable income will decline by 4.3% in the current fiscal year and by 2.8% in 2023/24, the sharpest drop in records dating back to the 1950s.
The balance sheet office said this two-year recession would wipe out all growth in living standards over the eight years to 2022.
Millions of Britons are already experiencing a cost-of-living crisis. Inflation reached 11.1% in October, the highest level in 41 years.
But Hunt said Britain needed painful financial therapy to keep calm returning to financial markets of late, even if most belt-tightening operations have been delayed until 2024, the expected date for the next national election.
The balance sheet office said the tax burden is on track to reach 37.1% of GDP within five years, the highest sustainable level since World War II, up from 33.1% in the 2019-2020 tax year.
“Credibility cannot be taken for granted and yesterday’s inflation numbers show we must continue a relentless fight to bring it down, including an important commitment to rebuilding public finances,” Hunt told parliament.
Hunt said the economy was already in recession and was set to contract next year as it struggled with inflation expectations to average 9.1% this year and 7.4% in 2023 before falling sharply.
The pound was down 1.1% against the dollar and 0.5% against the euro at 4:40 pm (1640 GMT), as investors assessed the size of the contraction, which appeared sharper than anything planned by other large rich economies.
“The UK remains somewhat of a difficult place to judge right now,” said Marcus Brooks, chief investment officer at Quilter Investors. “We are not necessarily at the end of the bad news train, and with the prolonged slump that price has been carrying we may need to wait for a more sustainable downward path for inflation.”
“one more step”
Ratings agency Moody’s, which warned last month that it could downgrade Britain’s credit rating after a short but turbulent term as prime minister, said Hunt’s plan was “another step” towards reforming public finances.
[1/8] British Chancellor of the Exchequer Jeremy Hunt, delivering the Autumn Statement in the House of Commons in London, Britain, November 17, 2022. UK Parliament/Jessica Taylor/ Posted via REUTERS
“However, the polarized domestic political environment and increased policy unpredictability may undermine efforts to achieve fiscal consolidation,” said Evan Wollman, Moody’s chief credit officer.
Jacob Rees-Mogg, a senior minister under Truss, said he was “particularly concerned” about the tax increases. Other Conservative lawmakers backed the plan.
And more people will have to pay basic and higher income tax, reducing Hunt to 125,000 pounds ($147,000), the minimum at which people pay the top 45% rate. He also cut the tax-free allowance for dividend income.
The threshold at which employers begin paying Social Security contributions will be frozen until 2028, costing companies more.
A temporary tax on profits from oil and gas companies will rise to 35% from 25% until 2028, and a similar tax of 45% will be imposed on nuclear and wind power producers, raising £15 billion next year.
Hunt said public spending will grow slower than the economy but rise in aggregate terms.
A reduced version of the current cap on energy costs would cost nearly £13bn next year, less than half of what Finance Minister Truss Kwasi-Kwarting had planned.
But pensions and welfare benefits will rise in line with inflation, which is a major fiscal expenditure.
Paul Johnson of the Institute for Fiscal Studies, a think tank, said the real pain of tax increases and spending restraint was set to come after the potential 2024 election, raising questions about whether that would actually happen.
slack now
The fiscal tightening came as the Office for Budget Responsibility said Britain was already in recession and predicted the economy would contract by 1.4% next year. In March, it predicted 1.8% growth in 2023.
OBR expects GDP growth of 1.3% in 2024 and 2.6% in 2025.
The opposition Labor Party said the Conservatives had failed to learn the lessons of previous attempts to reform public finances without a clear blueprint for economic growth.
Labor finance spokeswoman Rachel Reeves said: “This government has sent our economy into a doomsday spiral where low growth leads to higher taxes, lower investment and shrinking wages as public services dwindle.”
Hunt set the government two new fiscal rules for the government, including a target of reducing debt as a share of the economy within five years, a target the Balance Sheet Office said it was on track to meet.
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Additional reporting by Kaylee McClellan, Sarah Young, James Davey, Muviga M, Suban Abdullah, Farooq Suleiman, Elizabeth Piper, Alistair Smoot and Andrew MacAskill; drawings by Vincent Flassier; Written by William Schomberg; Editing by Catherine Evans
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