Almost two months after the turmoil caused by the mini-budget, Chancellor Jeremy Hunt will announce a raft of tax rises and spending cuts to reassure markets that the UK is in responsible hands. Today’s Autumn Statement is expected to outline plans to cut public spending by around £30bn, along with an extra £24bn in taxes. But many of the tough decisions may be put off until after the election – creating a political headache for Labour. Hunt is also expected to increase benefits, pensions and tax credits due to inflation – meaning a 10% increase next April. But support for energy bills will be reduced. the average annual bill could rise to £3,000 in the spring, from the current cap of £2,500, alongside a windfall tax on power generation. So, having reversed many of the measures in the mini-budget, Hunt is set to take the UK down a completely different path to Kwasi Kwarteng. Fall Statement: £30bn spending cuts, £24bn tax rises Stealth taxes a big issue as the thresholds are frozen Energy bills will increase from April. Support will continue, but will be reduced. Expenditure compressions Pensions and benefits rise with inflation https://t.co/knk4RNDz1o — Nick Eardley (@nickeardleybbc) November 17, 2022 But will markets prefer Austerity 2.0, despite the unfunded Trusonomics fiscal easing that has sunk the pound and raised borrowing costs? Mohamed El-Erian, president of Queens’ College, Cambridge, and chief financial adviser at Allianz, says Hunt faces a very difficult balancing act. He told Radio 4’s Today Program that markets will be looking for confirmation that the UK is restoring its economic reputation and putting its finances on a sound footing. However, investors are also interested in growth. El-Erian said: They will also look for measures to promote economic growth. It will be very difficult, striking the right balance, as there are so many economic and political crises here. And he agreed that Hunt risks going too far the other way if he simply announces massive tax increases and spending cuts. El-Erian warned: It could be seen as excessive austerity. At the end of the day, the answer to all the issues facing the UK today, from inflation to low growth to a damaged economic reputation, is high, sustained and inclusive growth. It is “absolutely critical” that the government delivers a package of measures to boost productivity and promote high economic growth, he added. Yesterday, the Bank of England warned that Britain is underperforming its rivals due to Brexit and a sharp fall in the workforce from the Covid pandemic. Andrew Bailey also told MPs that the UK’s international reputation has been damaged by September’s mini-budget. El-Erian agrees that the UK definitely has a credibility problem. But the bigger question is how big the fiscal black hole really is – and about the size of Hunt’s fiscal measure, its timing and the balance between spending and tax cuts. He says: There is concern that a political agenda may be at play as well as an economic agenda.
THE AGENDA
9.30 am GMT: ONS weekly economic activity and business information 9.30 am GMT: ONS report on UK GDP, by region and country: January to March 2022 10 am. GMT: Eurozone Inflation Indicator for October Late morning: Jeremy Hunt to deliver autumn statement 13:30 GMT: Weekly US jobless claims 1.30 p.m. GMT: US building permit data
Updated at 08.05 GMT Important events BETA filters Key Facts (6) Jeremy Hunt (5) United Kingdom (5) Kwasi Kwarteng (4) Bank of England (3) Mohamed El-Erian (3)
Hunt ‘risks pushing back economic recovery’
The most famous quote about bonds comes from Bill Clinton’s chief strategist, James Carville. Carville joked that if reincarnated, he’d like to come back as a bond market, rather than a president, pope or baseball star, because then “you can bully everybody.” Kwasi Kwarteng and Liz Truss can attest to that – they lost their grip on Downing Street after the bond market flexed its muscles, sending UK borrowing costs soaring. Photo: Bank of England But Jeremy Hunt risks worsening the recession by slashing spending and hiking taxes in a bid to appease bond watchers in the City. Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, says: The UK government’s autumn statement will mark a complete U-turn from the Truss administration’s plans to boost sugar growth through tax cuts that sparked chaos in bond markets and saw the UK risk premium soar. Gold yields have fallen significantly since the September scare that threatened to destabilize the UK financial system, and Sunak’s management is desperate to maintain its credibility. By taking all these steps, the government hopes to close the fiscal “black hole” that has emerged because successive Conservative ministers have said they want to see net debt reduced by 2025-2026. Sunak and Hunt are trying to dance to a tune they believe the bond markets are playing, but by sticking so tightly to what they perceive to be the rules, they risk playing it too safe and pushing the prospects for an economic recovery too far. ”
The UK faces a bleak economic outlook
Economists predict that the Office for Budget Responsibility will present a very bleak economic picture in their forecast today. Sanjay Raja, senior economist at Deutsche Bank, says: Expect a deep and prolonged recession in 2023 with growth likely to remain subdued until 2025 at the earliest. Inflation forecasts will also rise significantly, with more persistence in the OBR’s projections. And on the labor market, we expect the OBR to forecast a slow recovery in the labor force, with the unemployment rate rising to around 5.5% to 6% over the next two to three years. Overall, the difficult economic outlook is likely to underline the main reason for the size of the fiscal hole, with our borrowing forecast pushing just above £90bn in 2026/27 [compared with £32bn after the Spring Statement]. Photo: Deutsche Bank Torsten Bell, chief executive of the Resolution Foundation think tank, also expects some “pretty bad economic news”. Bell told Sky News that the UK faced a “bleak economic outlook”, with the economy growing very slowly and “probably ending this Parliament as weak as it started”. He added that this would be “much weaker than we previously expected”, and also predicted that unemployment would rise. The UK’s fiscal watchdog will release its latest outlook on the economy and public finances today, alongside the Chancellor’s autumn statement. Kwasi Kwarteng’s refusal to allow the Office for Budget Responsibility to assess his planned tax cuts contributed to market chaos after the mini-budget as investors viewed the measures as not credible. Harriet Baldwin, the chair of the Treasury Select Committee, welcomed the government’s change of heart this time. Baldwin told Times Radio: “That’s the number one thing we’ve been asking for and we’re happy to see it today.” He added that the Finance Committee hoped the Chancellor’s statement would help the UK’s “capacity to grow” but expected it would include some “delays to infrastructure projects”.
Full story: Millions of UK households to pay more for energy from April
Millions of British households will pay more for their energy from next April under plans to cut the generosity of the government’s gas and electricity support scheme expected to be announced by Jeremy Hunt on Thursday. The chancellor is likely to use the autumn statement to say the need to save money and reduce government borrowing will require the household energy price cap to rise from £2,500 to an expected £3,000 to £3,100. Hunt will also announce higher windfall taxes on oil, gas and power companies that have seen their profits soar after Russia’s invasion of Ukraine in February sent global energy prices skyrocketing. Despite the economy’s fragile state, the chancellor will say he needs to pump up to £60bn out of the economy through tax rises and spending cuts to help the Bank of England curb inflation. It is expected to lower the threshold at which people start paying the top 45pc rate of income tax. from £150,000 to £125,000, in a substantial change of direction from the later abandoned move to scrap the rate under the Liz Truss government. There are expected to be rises in capital gains tax and dividend tax, while personal tax thresholds are also likely to be frozen for two more years from 2025-26. Council tax could also rise as the rule limiting councils to 3% increases, unless they hold a referendum, it could rise to 5%.
Preparing for Austerity and Fiscal Regression
There are concerns that Hunt could return Britain to an era of austerity that will add to the woes facing consumers and households, says Victoria Scholar, chief investment officer at interactive investor. However, the Treasury has two main aims – firstly to outline a fiscal plan that complements the Bank of England’s monetary plan in terms of tackling inflation. He needs a strategy that helps reduce inflation, rather than focusing on growth, which was the mistake of Kwasi Kwarteng’s predecessor. The second aim is to reassure the electorate that this is a government of financial credibility, sound money and fiscal capacity, and to dispel the reputation created by September’s disastrous mini-budget by showing that the Treasury can balance the books by cutting spending and the increase in taxes. The fiscal downturn looks set to be a big theme this fall statement, Scholar adds. This is the trick where the chancellor freezes the levels at which people pay higher rates of tax. With upward pressures on…
