Hunt says Britain already in recession, economy to shrink 1.4% in 2023

LONDON – British Finance Minister Jeremy Hunt said on Thursday that Britain is already in recession, announcing cuts to growth forecasts as Russia’s war in Ukraine stokes inflation at a 41-year high that has sparked off a cost-of-living crisis.

The economy is forecast to shrink by 1.4 per cent in 2023, a downgrade from the previous official outlook for 1.8 per cent growth, Mr Hunt told the House of Commons in his Autumn Statement on Thursday.

He also lowered the growth prediction for 2024 to 1.8 per cent, citing the Office for Budget Responsibility (OBR) and blaming “global headwinds”.

The OBR forecast gross domestic product (GDP) would grow by 1.3 per cent in 2024 and by 2.6 per cent in 2025, Mr Hunt said, compared with its previous forecasts for growth of 2.1 per cent and 1.8 per cent, respectively.

In the statement, Mr Hunt outlined a £55 billion (S$89.36 billion) package of tax rises and spending cuts for the UK to plug the hole in the nation’s finances and restore confidence among investors.

The Chancellor of the Exchequer hit the wealthy with higher taxes on wages and dividends and extended a windfall tax on oil and gas companies, telling the House of Commons that he was prioritising “stability, growth and public services”.

“We take difficult decisions to tackle inflation and keep mortgage rates down,” Mr Hunt told lawmakers as he unveiled the statement – a budget in all but name.

“But our plan also leads to a shallower downturn, lower energy bills, higher long-term growth, and a stronger National Health Service (NHS) and education system.”

British inflation was 11.1 per cent in October, a 41-year high. It is forecast to average 9.1 per cent this year and 7.4 per cent in 2023.

The Chancellor also said public spending would grow more slowly than the economy, with a real-terms squeeze in spending in many departments, though overall spending in public services will rise over the next five years.

Mr Hunt said just over half of the needed fiscal consolidation would come from cuts in spending.

“We are going to grow public spending – but we’re going to grow it slower than the economy,” Mr Hunt said in his speech to Parliament.

Prime Minister Rishi Sunak’s government is pushing through the measures to restore confidence among investors in Britain’s ability to pay its way after a disastrous experiment with deep tax cuts by his predecessor, Ms Liz Truss. 

Mr Hunt said the aim of his programme is to get debt falling as a share of the economy by 2027-28, and to get public sector borrowing over the next five years below 3 per cent of GDP. 

Mr Hunt had described the decisions he announced on Thursday as “eye-watering” in their scale.

The task is enormous, patching up the economic damage wrought by the Covid-19 pandemic, the fallout from Russia’s war in Ukraine, and the disastrous tenure of Ms Truss and her chancellor, Mr Kwasi Kwarteng, whose massive programme of unfunded tax cuts sank the pound sterling and roiled bond markets. 

Mr Hunt – brought in by Ms Truss to replace Mr Kwarteng and steady market nerves, and kept on by Mr Sunak - had already reversed the bulk of that plan before Thursday.

Mr Hunt said it would not be possible to restore the aid budget to 0.7 per cent of gross national income from its current level of 0.5 per cent because of the “significant shock to public finances”.

But He announced a £3.3 billion increase in the NHS budget in 2022 and 2023, and a rise in spending for social care and schools over the next two years.

Outlining plans to reform the struggling NHS, Mr Hunt asked it to join all public services in tackling waste and inefficiency.

“We want Scandinavian quality alongside Singaporean efficiency, both better outcomes for citizens and better value for taxpayers,” said Mr Hunt.

“That does not mean asking people on the front line, often exhausted and burnt out, to work harder, which would not be fair. But it does mean asking challenging questions about how to reform all our public services for the better,” he added.

On Thursday, he raised taxes for the UK’s biggest earners as he sought to stabilise the public finances and shield the most vulnerable families from recession. 

Mr Hunt said he will lower the threshold for paying the top 45 per cent rate of income tax to £125,140 from £150,000 alongside a raft of measures to help pensioners and poorer households. People earning £150,000 a year will pay an additional £1,200 a year as a result, he said. 

Mr Hunt said he will also maintain the thresholds for paying national insurance and inheritance tax through 2028, dragging more people into paying higher taxes as surging inflation pushes up prices. 

He also raised state pensions and benefits by 10.1 per cent, in line with inflation, boosted the minimum wage to £10.42, a 9.7 per cent increase and capped rent hikes for social housing at 7 per cent.

The stakes are high: The ruling Conservatives trail Labour by about 20 points in the polls, with just over two years at most until the next general election. 

Mr Hunt is expected to achieve the savings he is after with a 60-40 split between spending cuts and tax rises, but the balance will be key.

Public services have already been pared back for a decade under Tory austerity, and voters have little appetite for more. 

Meanwhile, tax rises are anathema to Conservative philosophy, and Mr Sunak’s defeat to Ms Truss in this summer’s leadership contest was in a large part due to his record as chancellor in putting the country on track to its highest tax burden in seven decades.

The opposition Labour Party said the Conservative Party was failing to learn the lessons of past attempts to fix the public finances without a clear plan for economic growth.

On Thursday, Mr Hunt also announced a windfall tax on “excess” profits of some electricity generators to help pay for the continuation of a freeze on household energy bills.

A similar levy on oil and gas firms will rise to 35 per cent from 25 per cent as the government seeks to claw back cash from companies profiting from higher prices.

Energy rates for consumers will be capped at a higher level from April, pushing up the average bill by 20 per cent to £3,000, according to the budget.

Surging energy prices are stoking inflation that could leave millions in debt and unable to pay their bills this winter. Help for households from April is less generous than promises made by Ms Truss. 

The two windfall taxes on the energy sector will raise £14 billion next year.

Britain is the only Group of Seven (G-7) nation yet to recover its pre-pandemic size, having previously suffered a decade of near-stagnant income growth.

Mr Hunt had warned of more pain in his budget statement in the days leading up to Thursday’s announcement.

He says he can only slow the rise in borrowing costs if he can show investors that Britain’s 2.45 trillion-pound (S$4.01 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,” Mr Hunt said in excerpts of his speech.

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. BLOOMBERG, REUTERS