The UK is raising taxes and cutting spending to restore market confidence in the UK

By David Milliken, Andy Bruce, and William Schomberg

UK Finance Minister Jeremy Hunt has announced that a tightening of public spending is needed with a series of tax increases and budget plans after former Prime Minister Liz Truss took a toll on the country’s fiscal reputation.

Hunt outlined a £55bn (around NZ$106bn) plan for fiscal consolidation (almost half from tax increases) and said the economy was already in recession, averaging 9.1% this year. He said it will contract next year as it struggles with expected inflation. year, in 2023 he is 7.4%.

Britain’s budget watchdog says rising prices will push people’s wages even lower, reducing living standards by 7% by April 2024, when parliamentary elections are due, and ruining eight years of economic growth to 2022. He said he would do it. life crisis.

The tax burden will reach 37.1% of GDP at the end of the five-year forecast period, the highest level since World War II, from 33.1% in the 2019-20 tax year, according to OBR. That’s it.

But Hunt said a painful fiscal treatment cannot be avoided if the UK builds on the recent resurgence of calm in financial markets.

“Confidence cannot be taken for granted and yesterday’s inflation rate showed that a relentless battle must continue to reduce confidence, including a key effort to consolidate fiscal policy,” he told Congress. There are,” he said.

UK inflation was 11.1% in October, the highest in 41 years.

Sterling fell almost 1% against the dollar and 0.2% against the euro after Hunt spoke as investors assessed the scale of the belt tightening.

Susannah Streeter, senior market analyst at Hargreaves Lansdowne, said: “There are still concerns about the long-term health of the UK economy, whether (Mr Hunt) is giving enough of a long-term growth outlook. ‘ said.

Mr Hunt announces changes that mean more people will pay basic income tax and higher income tax, lowering the threshold for people paying up to 45% tax rate to £125,000 and tax exemption on income from dividends We have reduced the frame.

He has frozen the threshold for employers to start paying Social Security contributions until 2028.

Taxes on energy company profits will increase from 25% to 35% from Jan. 1 through 2028, with a temporary new tax of 45% on power producers and a total tax increase next year, Hunt said. will raise £14 billion in

Public spending will grow more slowly than the economy, but overall it will increase, he said.

A reduction in existing energy cost caps could cost just under £13bn next year, about half what former Finance Minister Kwasi Kwarten had planned.

But pensions and benefits will increase in line with inflation, putting a heavy strain on the public finances as a result of rising prices this year.

Paul Johnson of the Institute for Fiscal Affairs think tank said the UK will be spared significant spending cuts over the next two years and tax increases will be limited in the short term, but the real pain will come after the 2024 elections.

recession now

Hunt said forecasts from the independent Office of Budget Responsibility (OBR) “show a clear picture of the impact of global headwinds on the UK economy”.

We now expect gross domestic product to contract by 1.4% next year compared to a 1.8% growth forecast in March. Since then, the UK economy has struggled with inflation, a slowing global economy and turmoil in financial markets during Truss’ short term.

The OBR forecasts GDP growth of 1.3% in 2024 and 2.6% in 2025, compared to previous projections of 2.1% and 1.8% respectively. Inflation for 2022 will rise to 9.1% from his March forecast of 7.4%, and next year he expects it to rise to 7.4% from 4.0%.

The opposition Labor Party said the Conservative Party had failed to learn the lessons of past attempts to fix the economy without a clear plan for economic growth.

Rachel Reeves, Finance Spokeswoman for the opposition Labor Party, said: “This government is putting our economy in a loop of fate where low growth leads to higher taxes, less investment and squeezed wages as public services shrink.” said..

But Hunt and Snack say their plan will restore investor confidence.

Her policies pushed the pound to a record low against the US dollar, threatened to disrupt the housing market and forced the Bank of England to step in to support the bond market.

The only G7 economy that has not yet recovered to its pre-pandemic size, the UK suffered a decade of largely stagnant income growth even before the Covid-19 outbreak.

Ahead of Thursday’s announcement, Hunt said only by showing investors that the UK’s £2.45 trillion (NZ$4.74 trillion) debt pile will begin to fall as a share of GDP can it slow the rise in borrowing costs. warned.

Thursday’s forecast by OBR showed that the target would be achieved in fiscal year 2027/28.

– Reuters