British finance minister outlines £55b squeeze on UK as recession starts
BRITISH finance minister Jeremy Hunt has outlined a £55 billion (S$89.4 billion) package of tax rises and spending cuts for the United Kingdom to plug a hole in the nation’s finances and restore confidence among investors.
The Chancellor of the Exchequer, in what is called his Autumn Statement, hit the wealthy with higher taxes on wages and dividends and extended a windfall tax on oil and gas companies, telling the House of Commons on Thursday (Nov 17) that he was prioritising “stability, growth, and public services”.
“We take difficult decisions to tackle inflation and keep mortgage rates down,” he told lawmakers, as he unveiled his Autumn Statement – a budget in all but name. “But our plan also leads to a shallower downturn, lower energy bills, higher long-term growth, and a stronger NHS (National Health Service) and education system.”
Prime Minister Rishi Sunak’s government is pushing through the measures to restore confidence among investors in Britain’s ability to pay its way after a disastrous experiment with deep tax cuts by his predecessor, Liz Truss.
Hunt said the aim of his programme is to get debt falling as a share of the economy by 2027-28, and to get public sector borrowing over the next five years below 3 per cent of GDP.
The task is enormous, patching up the economic damage wrought by the Covid-19 pandemic, the fallout from Russia’s war in Ukraine, and the disastrous tenure of Sunak’s predecessor, Liz Truss and her Chancellor, Kwasi Kwarteng, whose massive programme of unfunded tax cuts sank the pound and roiled the bond markets.
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Hunt, brought in by Truss to replace Kwarteng and steady market nerves, and kept on by Sunak – had already reversed the bulk of that plan before Thursday. While he said Kwarteng had been right to pursue growth, he added that “unfunded tax cuts are as risky as unfunded spending”.
On growth, Hunt said he wanted to spur energy, infrastructure and innovation. The Treasury will work to boost renewable energy and efficiency programmes. It is also maintaining capital budgets for projects like the HS2 rail upgrade and other transport projects, and setting aside more resources for research and development.
“We need to get better at turning world-class innovation into world-class companies,” Hunt said. “Turn Britain into the world’s next Silicon Valley.”
The Chancellor said the Office for Budget Responsibility, the government’s fiscal watchdog, now forecasts the British economy to shrink by 1.4 per cent next year, a downgrade from the previous official outlook for 1.8 per cent growth. He also lowered the prediction for 2024, blaming “global headwinds”, primarily the rise in energy prices stoked by Russia’s war in Ukraine.
“We want low taxes and sound money,” Hunt said. “But sound money has to come first because inflation eats away at the pound in people’s pockets even more insidiously than taxes.”
Infrastructural development
Other measures outlined by Hunt included the government’s plan to proceed with a new nuclear plant, Sizewell C, in eastern England; a commitment was also made to the HS2 high-speed rail project, plans to build more hospitals and roll out super-high-speed broadband.
Spending cuts
But he also said public spending will grow more slowly than the economy, and departmental budgets will have to have real-term spending cuts. He said just over half of the package is made up of spending cuts, with just under half coming from tax rises.
It’s an important moment for the Conservative government, which trails the Labour opposition by about 20 points in the polls with just over two and a half years, at most, before the next general election.
The balance between tax rises and spending cuts is key. Public services have already been pared back for a decade under Tory austerity, and voters have little appetite for more.
Meanwhile, tax rises are anathema to Conservative philosophy, and Sunak’s defeat to Truss in this summer’s leadership contest was in a large part due to his record as Chancellor in putting the country on track to its highest tax burden in seven decades.
Hunt also said he would raise state retirement and welfare benefits payments in line with inflation. Benefit payments will go up by 10.1 per cent, which would cost about £11 billion.
Minimum wage boost
The Chancellor of the Exchequer also announced that the country’s minimum wage would be increased by 9.7 per cent to £10.42 per hour from April 2023, as part of wider measures to help people with a cost-of-living crisis.
Insurers to boost investment in the economy
Hunt also announced a plan to free up billions of pounds from the capital buffers of insurers to invest in infrastructure, potentially boosting economic growth.
Britain inherited insurance capital rules, known as Solvency II, from the European Union (EU), and has faced pressure from industry to ease them following its exit from the EU to keep the sector competitive.
By the end of next year, Britain would also use its “Brexit freedoms” to write its own rules to review and decide changes to EU regulations in five growth industries, including financial services.
Bond sales
The UK said it plans to sell £169.5 billion of bonds in the current fiscal year – less than expected.
The nation’s Debt Management Office decreased sales by £24.4 billion from what was slated in the last fiscal update in September. The median estimate of 10 banks surveyed by Bloomberg was for £185 billion of issuance.
The prospect of tighter fiscal policy has encouraged investors to pile back into UK bonds. The yield on 10-year bonds has dropped over a percentage point from a high in October, when the market was still coming to terms with the previous administration’s pledge for vast unfunded tax cuts.
‘Economy to shrink by 2%’
Britain’s economy will shrink by 2 per cent in a recession that started during the previous quarter, and is on track to last just over a year, the Office for Budget Responsibility (OBR) forecast on Thursday, after the new government unveiled its fiscal plans.
The OBR forecast Britain’s economy would not reach its pre-pandemic size until the final quarter of 2024.
“The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022,” it said. BLOOMBERG, REUTERS
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