Chancellor of the Exchequer Jeremy Hunt arrives at the back entrance of Downing Street, London.
Aaron Chown – Pa Pictures | Pa Images | Getty Images
LONDON – New British Chancellor of the Exchequer Jeremy Hunt must weigh the country’s economic peril against his party’s political survival on Thursday as he delivers a long-awaited fiscal statement.
Hunt is expected to announce tax increases and spending cuts totaling between £50 billion ($58.85 billion) and £60 billion a year as he tries to plug a big hole in the country’s public finances, while reassuring the market about its fiscal credibility after the chaos . triggered by the disastrous “mini-budget” of former Prime Minister Liz Truss at the end of September.
The Bank of England projected that Britain is at the start of its longest 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 wrestle inflation back to a target from the 40-year high of 10.1% seen in September, and earlier this month imposed its biggest rise in interest rates since 1989.
“We will see everyone paying more tax. We will 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 beyond April.
Reports have suggested that many of the most radical austerity measures planned by new Prime Minister Rishi Sunak’s government will come into effect from 2025, after the next general election.
“The government and the Bank of England find themselves in a very difficult position because the chancellor election next week is not so much about what will happen – he has already told the market that the debt forecast has to come down over the next few years – it it’s rather the time,” Hugh Gimber, global market strategist at JPMorgan Asset Management, told CNBC on Friday.
He added that Hunt faces a key decision between front-loading the pain the Sunak government has promised to rebalance 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 case economically to say front-load it, bring it forward, reduce the amount that the Bank of England has to do in terms of trying to slow the economy, but politically, it’s clearly a tough challenge there,” Gimber said.
Most opinion polls in recent weeks give the main opposition Labor Party around a 20-point lead over Sunak’s ruling Conservatives, indicating that the damage suffered under Truss’s 45-day mandate, and the series of scandals that plagued her predecessor Boris Johnson, it wasn’t. unwound by Sunak’s promise of a return to fiscal credibility.
Spending cuts versus taxes
Thursday’s statement will be accompanied by a long-awaited set of projections from Britain’s independent Office for Budget Responsibility (OBR), and following 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 was likely to project a “deep and protracted recession” in 2023, with growth remaining muted until 2025 at the earliest and inflation projections rising significantly to reflect more stable prices.
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.
“Overall, the challenging economic outlook is likely to underline the main reason for the size of the fiscal hole, with our borrowing projections just over GBP 90 billion in 2026/27 (OBR Spring Statement. GBP 32 billion),” Deutsche Bank Chief UK. Economist Sanjay Raja said.
Raja expects spending cuts and tax rises to be split 60:40 in Hunt’s plans, although said these would be done in “stealth”, with tax rises focused on freezing personal allowances and tax brackets, while reducing the additional tax threshold of 150,000 £. to £125,000 to generate more revenue for the Treasury.
“Away from ‘stealth taxes,’ we expect to see some more options announced
Thursday. Firstly, a council tax increase with local authorities allowed the level of council tax to be raised above 3% without a referendum,” said Raja.
“And secondly, an increase in both the duration and scale of the income tax on oil and gas ‘excess profits’.”
In total, Deutsche projects that the “fiscal drag” from theft taxes and higher capital gains taxes will net the Treasury around £35bn due to high inflation and energy prices.
Spending cuts, again implemented by “stealth,” could take the form of a “nominal cash freeze to departmental budgets,” Raja said, with spending budgets filled at least up front.
“Capex plans are also likely to be tweaked over the coming years, and ‘efficiency savings’ are likely to feature as part of the chancellor’s plans to plug the fiscal hole,” Raja said.
“This will help offset some of the spending rises expected with welfare and pension payments now likely to be increased by inflation rather than income growth.”
Market waits breathlessly
The market rejected the tax fiscal announcements of September by former Finance Minister Kwasi Kwarteng, with sterling sliding to an all-time low and government bond yields are spiking so fast that the Bank of England was forced to step in and prevent the collapse of pension funds.
“If he wants to calm the markets, he will have to announce early action in the form of a big fiscal tightening. That could deepen and/or prolong the recession and ultimately create an even bigger fiscal hole,” said Ruth Gregory, senior UK. economist at Capital Economics.
“If he tries to minimize the economic pain, he risks unsettling the markets and encouraging another rise in gold yields, which would also worsen public finances.”
Capital Economics expects Hunt to unveil fiscal tightening measures of £54bn, around 1.9% of GDP, but for this to be financed mainly through nuanced tax rises rather than spending cuts, with most policies “starting later rather than earlier”. Gregory said.