By William Schomberg
LONDON (Reuters) – Finance minister Jeremy Hunt will bury Britain’s failed “Trussonomics” experiment on Thursday by cutting spending and raising taxes, moves that he and Prime Minister Rishi Sunak say are needed to restore investor confidence.
Britain is probably already in a recession with 11% inflation creating a cost-of-living crisis. It is the only Group of Seven nation yet to recover its pre-pandemic size having previously suffered a decade of near-stagnant income growth.
But Hunt has warned of more pain in his budget statement that will represent an abrupt reversal of policy from the unfunded tax cuts promised by former Prime Minister Liz Truss less than two months ago.
Her government’s short-lived “mini-budget” on Sept. 23 sent the pound slumping to an all-time low against the U.S. dollar, threatened chaos in the housing market, and eventually forced Truss to quit after just 50 days in Downing Street.
Investors took comfort when Hunt replaced Kwasi Kwarteng as chancellor of the exchequer in mid-October and immediately started steering the economy back towards a more orthodox path.
He and Sunak say they must now go further.
“Stability has returned to the United Kingdom but that’s because the expectation is that the government will make those difficult but necessary decisions,” Sunak said this week.
Critics say a return to austerity is unnecessary, will hurt millions of households and will deepen the expected recession.
But Hunt says he can only slow the rise in borrowing costs if he can show investors that Britain’s 2.45 trillion-pound ($2.91 trillion) debt mountain will start to fall as a share of economic output. Beating inflation is key to that.
“The Bank of England has my wholehearted support in its mission to defeat inflation… but we need fiscal and monetary policy to work together,” Hunt said in excerpts of his budget speech released by the finance ministry.
“We are taking a balanced path to stability,” he said. “But it depends on taking difficult decisions now.”
TAX RISES AND SPENDING CUTS
Britain’s government is aiming for more than 50 billion pounds of annual savings by five years’ time – equivalent to about 2% of annual economic output. How soon spending cuts and tax rises come will be key for the short-term economic outlook.
Hunt risks reviving tensions within the ruling Conservative Party, many of whose members were already upset at the scale of tax increases he announced when finance minister.
Hunt is expected to extend a freeze on the thresholds at which people start to pay income tax, dragging more people into the taxman’s net. He might cut the threshold for paying the higher rate of income.
News reports have said Hunt also plans to bring in more revenues from dividend and capital gains taxes while sources have said he is considering a big increase in a windfall tax on oil and gas firms and extending it to power generation firms.
New spending cuts could add to the public’s frustration with over-stretched public services, ranging from a health system bogged down in backlogs to dilapidated public housing.
Adjusted for inflation, budgets have been cut below 2010 levels for many departments with transport spending about 40% down and justice 20% beneath its level 12 years ago, the Institute for Fiscal Studies think-tank estimates.
Opinions polls show the opposition Labour Party has a big lead in opinion polls ahead of an expected election in 2024.
The budget statement will be accompanied by forecasts from the Office for Budget Responsibility which are likely to echo the BoE’s message that Britain is heading for a long recession.
Hunt has said he will address one of the drags on Britain’s economy which is a shortage of workers in the labour market.
(Writing by William Schomberg; Editing by Andrew Cawthorne)
