‘Tough decisions’: Britain announces higher taxes and spending cuts


London
CNN Business

The UK has already slipped into recession and is struggling with decades of high inflation, eroding the living standards of millions of people across the country. Now, the British also have to bear higher taxes and cuts to public services as the government tries to keep its finances on a stronger footing, underscoring the tough road ahead.

On Thursday, UK Prime Minister Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt unveiled their long-awaited budget plan aimed at saving 55 billion pounds ($65 billion).

“Credibility cannot be taken for granted,” Hunt said in a speech to Parliament, promoting a “robust commitment” to shore up public finances, which he acknowledged required “difficult decisions”.

The move represents a major turnaround for the UK. Less than two months ago, Hunt’s predecessor and former minister Liz Truss said the government would cut taxes and increase borrowing to try to generate growth. But investors revolted against the unorthodox approach and Truss resigned after just 45 days in office.

Hunt’s new plan highlights the extent to which a rapidly changing economic environment is forcing governments to adapt, as well as the need for political leaders and central bankers to work “in step” at a delicate time.

For years, interest rates were rock bottom and loans were very cheap. But as central banks aggressively raise borrowing costs to try to reduce inflation, this is no longer the case: putting pressure on countries like the UK to show they can manage their debts, even as a severe recession looms.

Yael Selfin, chief economist at KPMG UK, said other countries with heavy debt burdens could be forced to make equally undesirable decisions.

“It’s definitely a wake-up call for other governments,” Selfin said.

Britain is in a recession that will last just over a year, the country’s budget watchdog said in a new forecast published on Thursday. The Office for Budget Responsibility forecast that the UK economy will shrink by just over 2% and not return to its pre-pandemic size until the end of 2024.

During the recession, the OBR said real household incomes are expected to fall by more than 7%, falling back to levels last seen in 2013-14. More than half a million people are expected to lose their jobs.

Despite this, Hunt said the government needed to find a way to reduce public debt as a proportion of the UK economy within five years and keep public sector borrowing below 3% of gross domestic product, or GDP, at that time.

To help achieve this goal, taxes will increase. Although “all taxpayers will be asked to contribute”, according to the Treasury, a major change will put more people in the highest income tax bracket. The threshold at which workers are taxed at 45% has been reduced from £150,000 ($177,000) to around £125,000 ($148,000).

The UK is also raising its excise tax on oil and gas companies, while slapping a new levy on electricity generators. Hunt previously said the corporation tax rate will rise to 25% from April.

According to the OBR, the tax burden in the UK is on track to rise to the highest sustained level since the Second World War.

Public spending, on the other hand, will be reduced, although a large part of the reductions will occur in two years, after the next elections.

“We have to make tough decisions about public finances, so we will increase public spending, but we will grow it more slowly than the growth of the economy,” Hunt said.

It also said that while Britons will continue to receive support for their energy bills beyond next spring, average households should expect to pay £3,000 ($3,541) a year, up from £2,500 ( $2,951).

This time, investors seemed to be on board. The pound fell 0.8% after Hunt’s speech to $1.18. It has risen almost 5% since Truss left office, but remains almost 13% lower against the US dollar this year. Benchmark 10-year UK government bond yields, which move at opposite prices, rose slightly to 3.19%.

But there is a risk that the recession could last longer than the OBR has forecast, or that the recovery could be weaker. The Bank of England has said the UK could be in recession for two years. That would require the government to recalibrate its plans once again, Selfin said.

“The main concern is that as we go forward, we could see a slightly worse environment than the OBR forecast, and so the improvements in public finances may not be as rapid,” Selfin said, noting that markets could be “nervous” again. ” in this case.

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