The UK has already entered recession and is struggling with decades of high inflation, eroding living standards for millions of people across the country. Now Britons must also enjoy higher taxes and cuts to public services as the government tries to get its finances on a firmer footing – underlining the tough road ahead.
On Thursday, UK Prime Minister Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt unveiled their long-awaited budget plan aimed at saving 55 billion pounds ($65 billion).
“Credibility cannot be taken for granted,” Hunt said in a speech to parliament, promoting a “firm commitment” to supporting public finances, which he acknowledged required “difficult decisions”.
The move marks a major shift for the UK. Less than two months ago, Hunt’s predecessor and former prime minister Liz Truss said the government would cut taxes and boost lending in a bid to generate growth. But investors rebelled against the unorthodox approach and Truss resigned after just 45 days in office.
Hunt’s new plan highlights the extent to which a rapidly changing economic environment is forcing governments to adapt, as well as the need for political leaders and central banks to work on key at a sensitive time.
For years, interest rates were rock bottom and borrowing was cheap. But as central banks aggressively raise borrowing costs in a bid to reduce inflation, that is no longer the case – putting pressure on countries like Britain to show they can manage their debts, even as a hard recession looms.
Yael Selfin, chief economist at KPMG UK, said other countries with high debt loads could be forced to make similar undesirable choices.
“It’s definitely a wake-up call for other governments,” Selfin said.
The UK is in a recession that will last just over a year, the country’s budget watchdog said in a new forecast published on Thursday. The Office for Budget Responsibility has predicted that the UK economy will shrink by just over 2% and not return to its pre-pandemic size until the end of 2024.
During the recession, the OBR said real household incomes are expected to fall by more than 7%, falling back to levels last seen in 2013-2014. More than half a million people are expected to lose their jobs.
Still, Hunt said the government needed to find a way to reduce public debt as a proportion of the UK economy in five years and keep public sector borrowing below 3% of GDP, or GDP, in that the point.
To achieve this goal, taxes will be raised. While “all taxpayers will be asked to contribute”, according to the Treasury, one big change will put more people in the income tax bracket for the highest earners. The threshold at which earners are taxed at 45% has been reduced from £150,000 ($177,000) to around £125,000 ($148,000).
The UK is also raising its windfall tax on oil and gas companies, while imposing a new levy on electricity generators. Hunt previously said the corporate tax rate would rise to 25% from April.
According to the OBR, the tax burden in the UK is set to rise to its highest sustained level since World War II.
Public spending, meanwhile, will be cut — although much of the cuts will take place over two years, after the next election.
“We have to make tough decisions on public finances, so we will increase public spending, but we will increase it more slowly than the economy grows,” Hunt said.
He also said that while Britons would continue to receive support for their energy bills after next spring, average households should expect to pay £3,000 ($3,541) a year, up from £2,500 ($2,951).
This time, investors seemed to be on board. The pound fell 0.8% after Hunt’s speech to $1.18. It has risen almost 5% since Truss resigned, but remains almost 13% lower against the US dollar this year. Yields on benchmark 10-year UK government bonds, which are moving opposite prices, rose slightly to 3.19%.
However, there is a risk that the recession could last longer than the OBR had forecast, or that the recovery could be weaker. The Bank of England said the UK could be in recession for two years. That would require the government to recalibrate its plans, Selfin said.
“The main concern is that as we go forward, we could see a slightly worse environment than the OBR was forecasting, and therefore improvements in public finances may not be as quick,” Selfin said, noting that markets would they could again become “nervous. ” In this case.
