UK chancellor of the exchequer Jeremy Hunt faces a clear yet far from straightforward task on Thursday: reassure markets he can stabilise the public finances without inflicting devastating damage on public services.
If he gets it wrong during his statement to the House of Commons, Hunt risks putting the Conservatives on course for a seismic loss at the next general election, which is due in about two years at the latest. Britons facing a record squeeze on living standards and seeing the health service in crisis would be unlikely to forgive the Tories, who have been in power since 2010.
“We will face into the storm,” Hunt will say, according to remarks released by the finance ministry that reference “global energy and inflation” crises – but not Brexit – as economic headwinds facing the UK. Fixing problems “depends on taking difficult decisions now,” he will also say.
Hunt and prime minister Rishi Sunak want Britain’s debt to be falling as a share of the economy by 2027-28, a goal that will require £55 billion (€65 billion) of savings. Hunt is expected to set out plans achieving that aim with a 60-40 split between spending cuts and tax rises.
Hunt will frame his economic plans against the latest forecasts from the fiscal watchdog the Office for Budget Responsibility – and most economists expect them to follow the Bank of England in forecasting a recession in the year ahead.
Interest rates – which were at 0.1% a year ago – are now expected to reach 4.5%, hitting businesses and mortgage borrowers. Inflation is at a 41-year-high, squeezing household spending power and fuelling unrest among public-sector workers over real-terms cuts in wages.
Deutsche Bank economist Sanjay Raja expects the fiscal watchdog to also say that the UK’s growth capacity is smaller than thought, partly due to labour market problems. Structurally weaker growth means the UK can raise less in tax to pay for the public services it wants, complicating Hunt’s main challenge.
Hunt is expected to highlight an expanded windfall tax on oil and gas profits, plus tax hikes aimed at wealthier Britons. They could include making more people pay the top rate of income tax, raising the levy on capital gains and hitting dividend income. At the same time, he’s expected to raise revenue by freezing the thresholds where different income tax rates kick in.
He will try to mitigate criticism of raising taxes during a cost-of-living crisis by announcing an increase in the minimum wage, extra support to help with rising prices and boosting both welfare and pension payments in line with inflation.
The government argue there’s no alternative to their fiscal tightening given the urgent need to tame inflation, which is at 11.1%. The chancellor will blame Russia’s war in Ukraine and ongoing supply chain issues 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 failing and unemployment rising. He will also say fiscal and monetary policy must work together. That was not the case during Liz Truss’s short-lived administration.
Persistent high inflation worries Hunt because it threatens higher interest rates, which further weaken the UK’s fiscal footing. Every 1 percentage point rise adds about 10 billion to debt servicing 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.
Hunt is due to reveal real-terms cuts to most departmental budgets, heralding fresh pain for Britain’s already overstretched front-line public services. Yet he’s expected to ensure most of the squeeze is not felt until after 2024 – so only once the next general election is out of the way.
That would be a naked attempt to maximise the Conservative Party’s chances of re-election, while giving Hunt the flexibility to scale back the level of austerity if Britain’s economic outlook improves in the meantime. With the Tories trailing Labour by about 20 points in the polls, the question is whether future cuts look better to voters than current ones.
Chancellors are known for trying to pull a “rabbit from the hat at the end of a budget speech to lift the mood and steal the headlines. Hunt has warned “this is not going to be a time for rabbits, but Sunak was well known for under-promising and over-delivering while in charge of the Treasury.
According to Treasury officials familiar with Hunt’s thinking, the chancellor is planning to announce billions of pounds of funding to help people insulate homes and upgrade boilers, as part of a plan to cut Britain’s energy demand. – Bloomberg
