Aaron Chown – Pa Images | Pa Images | Getty Images LONDON — Britain’s new Chancellor of the Exchequer Jeremy Hunt must weigh the country’s economic risk against his party’s political survival on Thursday as he delivers a long-awaited budget statement. Hunt is expected to announce tax increases and spending cuts totaling between 50 billion pounds ($58.85 billion) and 60 billion pounds a year as he tries to plug a major hole in the country’s public finances while reassuring the market about its fiscal credibility after chaos. unleashed by former Prime Minister Liz Truss’ disastrous “mini-budget” at the end of September. The Bank of England has predicted that the UK is at the start of its deepest recession on record and the Office for National Statistics confirmed on Friday that GDP contracted by 0.2% in the third quarter of 2022. The Bank is also trying to bring inflation back down on target from a 40-year high of 10.1% hit in September, and earlier this month it imposed its biggest rate hike since 1989. “We’re going to see everyone paying more tax. We’re going to see spending cuts,” Hunt told the BBC on Sunday, while also promising the government would deliver a new and more focused plan to help with household energy bills after April. Reports say many of the most radical austerity measures planned by new Prime Minister Rishi Sunak’s government will take effect from 2025 onwards, after the next general election. “The government and the Bank of England are in a very difficult position because the choice of chancellor next week is not so much about what is going to happen – he has already told the market that the debt provision must be cut by next few years — it’s probably the timing,” Hugh Gimber, global markets strategist at JPMorgan Asset Management, told CNBC on Friday. He added that Hunt faces a key decision between preloading the pain the Sunak government has promised to balance the economy and delaying the major impact of the new measures to prevent further political damage, risking prolonging the crisis. “At the moment, you can make a strong economic case to say frontload, push it forward, reduce the amount the Bank of England has to do in terms of trying to slow the economy, but politically, clearly there is a difficult challenge there,” Gibber said. Most polls in recent weeks put the main opposition Labor Party about a 20-point lead over Sunak’s ruling Conservatives, suggesting the damage suffered during Truss’ 45-day term and the string of scandals that dogged her predecessor Boris Johnson , have not been put off by Sunak’s promise of a return to fiscal credibility.
Spending cuts versus tax increases
Thursday’s statement will be accompanied by a long-awaited set of forecasts from the UK’s independent Office for Budget Responsibility (OBR), and after the Bank of England’s gloomy outlook a few weeks ago, economists expect a similarly bleak picture to emerge. In a note on Monday, Deutsche Bank said the OBR is likely to forecast a “deep and protracted recession” in 2023, with growth muted until 2025 at the earliest and inflation forecasts rising significantly to reflect more persistent price increases. Deutsche also expects the OBR to forecast a slow recovery in the country’s tight labor market, with unemployment rising to around 5.5-6% over the next two to three years. “Broadly speaking, the difficult economic outlook is likely to underline the main reason for the size of the fiscal hole, with our borrowing forecast pushed to just above GBP90bn in 2026/27 (OBR Spring Statement. GBP32bn ),” said Deutsche Bank UK chief economist Sanjay Raja. Rajah expects spending cuts and tax rises to be split 60:40 in Hunt’s plans, although he said these would be done in “stealth”, with tax rises focused on freezing personal allowances and tax margins. while it will reduce the additional rate threshold from £150,000 to £125,000 in order to generate more revenue for the Treasury. “Apart from ‘stealth taxes’, we expect a few more options to be announced on Thursday. Firstly, a council tax increase with local authorities allowed to raise the level of council tax above 3% without a referendum,” Raja said . “And second, increasing both the duration and scale of the oil and gas windfall ‘excess profits’ tax.” Overall, Deutsche predicts the “fiscal blowback” from hidden taxes and higher windfalls will cost the Treasury about £35bn, given high inflation and energy prices. The spending cuts, which are again carried out through “hidden” means, could take the form of a “nominal cash freeze in departmental budgets”, Raja said, with spending budgets barely replenished going forward. “Capex plans are also likely to be cut in the coming years and ‘efficiency savings’ are likely to feature as part of the Chancellor’s plans to plug the budget hole,” Raja said. “This will help offset some of the expected spending increases, as welfare and pension payments are now likely to be met by inflation rather than earnings growth.”
The market is waiting with bated breath
The market flatly rejected September’s fiscal announcements of tax cuts by former finance minister Kwasi Kwarteng, with sterling plunging to record lows and government bond yields soaring so fast the Bank of England was forced to step in and prevent the collapse of pension funds. “If he wants to reassure the markets, he should announce early measures in the form of a major fiscal tightening. This could deepen and/or prolong the recession and ultimately create an even bigger fiscal hole,” said Ruth Gregory, senior employee in the United Kingdom. economist at Capital Economics. “If it tries to minimize the financial pain, it risks upsetting markets and triggering a new rise in gold yields, which will also strain public finances.” Capital Economics expects Hunt to unveil fiscal tightening measures of £54bn, around 1.9% of GDP, but this will be financed mainly by small tax rises rather than spending cuts, with most policies “kicking in later rather than sooner ». said Gregory.
