Chancellor of the Exchequer Jeremy Hunt has a clear but far from easy task on Thursday: to reassure markets that he can stabilize the UK’s public finances without wreaking havoc on public services.
If his statement to the House of Commons is wrong, Hunt risks putting the Conservatives on an earthquake-proof course in the next general election, which is two years from now. Brits, who are facing a record slump in living standards and the National Health Service in crisis, are unlikely to forgive the Tories who have been in power since 2010.
“We will face the storm,” Hunt will say, according to Treasury Department statements, which describe “global” energy and inflation crises – but not Brexit – as economic headwinds for Britain. Fixing problems “depends on making tough decisions now,” he will also say.
Hunt and Prime Minister Rishi Sunak want Britain’s debt as a share of the economy to fall by 2027-28, a target that will require £55bn ($65bn) in savings. Hunt is expected to come up with plans to meet that goal with a 60/40 split between spending cuts and tax hikes.
Hunt will base its economic plans on the latest forecasts from the Office for Budget Responsibility – and most economists expect to follow the Bank of England in forecasting a recession in the coming year.
Interest rates – which were 0.1 percent a year ago – are now expected to hit 4.5 percent, hitting businesses and mortgage borrowers. Inflation is at a 41-year high, squeezing household spending power and fueling unrest among public sector workers over real wage cuts.
Deutsche Bank economist Sanjay Raja expects the fiscal watchdog to also say the UK’s growth capacity is lower than thought, partly due to labor market woes. Structurally weaker growth means the UK can collect fewer taxes to pay for the public services it wants, complicating Hunt’s biggest challenge.
Former Chancellor of the Exchequer George Osborne famously coined the phrase “all together” during the last round of austerity in 2010, and Hunt will likely at least try to reiterate that notion. He has pledged to protect the most vulnerable, although he has warned against making “obvious” difficult decisions.
He is expected to highlight an expanded windfall tax on oil and gas profits, as well as tax increases for wealthier Britons. These could include getting more people to pay the highest income tax rate, increasing the tax on capital gains, and hitting dividend income. At the same time, he is supposed to increase revenue by freezing the thresholds at which different income tax rates apply.
According to the Times newspaper, Hunt will seek to defuse criticism of tax hikes during a cost-of-living crisis by announcing an increase in the minimum wage, additional support as prices rise, and increases in Social Security and pension payments in line with inflation.
Borrowing the Osborne approach, Hunt and Sunak will argue that given the urgent need to tame inflation, which sits at 11.1 percent, there is no alternative to fiscal tightening. The chancellor will blame Russia’s war in Ukraine and ongoing supply chain problems as the world emerges from the pandemic.
“High inflation is the enemy of stability,” Hunt will say. “It means higher mortgage rates, more expensive food and fuel bills, businesses fail and unemployment rises.” He will also say that fiscal and monetary policy must work together. That was not the case during Liz Truss’ short-lived tenure.
Persistently high inflation worries Hunt because it threatens higher interest rates that will further weaken the UK’s fiscal base. Every 1 percentage point increase adds about £10bn to debt service costs. Investec Economics estimates the bill will reach £105 billion this year, or about a tenth of government revenue – a level not seen since the early 1980s. Over the next five years, higher interest rates will add more than £100bn to Britain’s debt service costs, according to Bloomberg Economics.
Hunt is set to announce real cuts to most departmental budgets, heralding new pains for Britain’s already stretched front-line public services. However, he is expected to ensure that most of the pressure is not felt until after 2024 – that is, when the next general election is out of the way.
That would be an open attempt to maximize the Conservative Party’s re-election chances while giving Hunt the flexibility to scale back austerity if Britain’s economic outlook improves in the meantime. With the Tories about 20 points behind Labor in the polls, the question is whether future cuts will look better to voters than current ones.
Chancellors have been known to try to pull a “rabbit out of a hat” at the end of a budget speech to raise spirits and steal headlines. Hunt has warned “this is no time for rabbits,” but Sunak was known for under-promising and over-delivering while in charge of Treasury.
According to finance officials familiar with Hunt’s thinking, the Chancellor plans to announce billions of pounds in funding to help people insulate homes and modernize boilers, as part of a plan to cut Britain’s energy needs by 13 per cent.
https://www.independent.ie/business/world/hunt-set-to-cut-spending-and-increases-taxes-as-uk-faces-into-the-storm-42151281.html Hunt wants to cut spending and raise taxes as Britain is ‘caught in the storm’