British Chancellor of the Exchequer Jeremy Hunt on Thursday laid bare a bleak new reality for the British economy, one plagued by weak growth and rising taxes for years to come.
Pinned in by a toxic combination of recession, investor skepticism and the sharpest squeeze in living standards since records began 66 years ago, Hunt pieced together ￡55 billion (US$59.5 billion) of tax increases and spending cuts to stabilize public finances.
However, he delayed the brunt of austerity for two years to lend the troubled economy — and British Prime Minister Rishi Sunak’s Conservative Party — some support.
Photo: AP
The measures announced to a subdued British House of Commons still included borrowing an extra ￡300 billion over the next five years, which combined with rising interest rates, will likely have dramatic consequences.
This year alone, borrowing costs on the UK’s debt are expected to run to ￡120 billion.
That is 5 percent of GDP and 12 percent of British government receipts, a burden not seen since data gathering began in 1956.
Photo: AFP / UK PARLIAMENT / JESSICA TAYLOR
It also exceeds the level of government department spending on everything except the British National Health Service.
Effectively, higher rates have added an extra bill to the UK’s ￡2.5 trillion debt pile, which Britons would have to cover.
“We have been living in a false paradise for many years,” said David Miles, head of economic forecasting at the Office for Budget Responsibility (OBR), an independent fiscal watchdog. “Until recently, people were willing to lend to the British government, and other governments, and lose 2 percent a year. The new reality is it will be more expensive for governments to borrow.”
Hunt sought to place the blame for the UK’s ills on Russian President Vladimir “Putin’s war in Ukraine” and “unprecedented global headwinds,” which have helped drive inflation to a 41-year high and forced the Bank of England to boost rates to 3 percent.
Bloomberg economists Jamie Rush and Dan Hanson said in a note that “the recession is likely to be nasty and Hunt has, rightly in our view, made use of the wiggle room afforded by his and Prime Minister Rishi Sunak’s perceived fiscal credibility.”
Our fear was that Hunt would feel compelled to frontload fiscal consolidation, amplifying the misery caused by the energy crisis,” they said. “Instead, he extended energy support and provided extra funding for health and education.”
However, OBR forecasts show the structural change in the public finances driven by debt servicing remains in the fiscal year 2027-2028, when inflation and growth are expected to have returned to more normal levels.
“Not just the scale, but the speed at which higher interest rates have pushed up costs should be a warning to future chancellors,” OBR chairman Richard Hughes said.
Having reversed former British prime minister Liz Truss’ ￡45 billion of unfunded tax cuts, Hunt’s plan means there has been a ￡100 billion swing in policy measures in less than two months — under the same Conservative Party.
Under Hunt’s plan, the tax burden on Britons is set to soar to 37.1 percent of GDP, the highest level since World War II.
However, Hunt did try to shield poorer Britons from the budget fallout, while helping them with the cost of living.
What he called a “balanced approach” imposed tax rises on wealthy households and business benefiting from high energy prices.
At the same time, Britain’s living wage would rise, while pension and welfare payments would increase in line with inflation, he said.
Even so, the hit to households — despite a total of ￡100 billion of support in energy bill subsidies and grants — is expected to deepen a recession forecast to last until the end of next year, causing output to contract 2 percent and 500,000 jobs to be lost.
Were it not for the measures to protect households, the economy would have shrunk 3 percent, the OBR said.
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