UK chancellor announces tax hikes, spending cuts to restore finances

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Chancellor of the Exchequer Jeremy Hunt of the United Kingdom (UK) leaves 11 Downing Street in London, Britain, on Nov. 17, 2022. [Photo/Xinhua]

Chancellor of the Exchequer Jeremy Hunt of the United Kingdom (UK) on Thursday announced a package of tax hikes and spending cuts worth 55 billion British pounds (65 billion U.S. dollars) in a bid to improve the public finances and restore the country's economic credibility.

Fiscal squeeze

"Today we deliver a plan to tackle the cost-of-living crisis and rebuild our economy," Hunt told the House of Commons in his Autumn Statement 2022. "Our priorities are stability, growth and public services."

To raise further funds, the threshold at which higher earners start to pay the top 45 percent rate will be reduced from 150,000 pounds to 125,140 pounds, while the income tax, inheritance tax and national insurance thresholds will be frozen for a further two years until April 2028, according to the chancellor.

To ensure that businesses making extraordinary profits due to the high energy prices also pay their fair share, the windfall tax on oil and gas companies will increase from 25 percent to 35 percent, with the levy remaining in place until March 2028, and a new, temporary 45 percent levy will be introduced for electricity generators.

On public spending, according to the statement, departments will be expected to work more efficiently and support the government's mission of fiscal discipline. From 2025-2026 onwards, day-to-day spending will increase more slowly by 1 percent above inflation.

Amid the cost-of-living crisis, the chancellor unveiled another support package. While the government is capping typical energy bills for households this winter at 2,500 pounds, the Energy Price Guarantee will continue to provide support from April 2023 with the cap rising to 3,000 pounds. Households on means-tested benefits, pensioners and people on disability benefits will receive new payments.

To ensure fiscal discipline, the chancellor also introduced two new fiscal rules: the country's national debt must fall as a share of gross domestic product (GDP) by the fifth year of a rolling five-year period; and public sector borrowing in the same year must be below 3 percent of GDP.

Overall, according to the government, the fiscal plan improves public finances by 55 billion pounds by 2027-2028.

The budget squeeze comes after a large-scale package of unfunded tax cuts announced by the government in September threw financial markets into turmoil as the fiscal giveaway measures were expected to ramp up public borrowing and they dealt a huge blow to the country's fiscal reputation.

Bleak outlook

"The chancellor has stayed true to his word in focusing on financial stability and targeting support for the most vulnerable in society. But in the teeth of a recession, this statement will not increase business confidence," Shevaun Haviland, director general of the British Chambers of Commerce (BCC), commented.

On Thursday, the fiscal watchdog Office for Budget Responsibility (OBR) said in its latest economic and fiscal outlook that rising prices would erode real wages and reduce living standards by 7 percent in total over the two financial years to 2023-2024, wiping out the previous eight years' growth, despite government support.

The squeeze on real incomes, rise in interest rates and fall in house prices would all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022, with a peak-to-trough fall in GDP of 2 percent, it said.

The OBR noted that the medium-term fiscal outlook has materially worsened since its March forecast due to a weaker economy, higher interest rates and higher inflation.

Based on the policy as it stood in March, the OBR said, government borrowing would have been 108 billion pounds, or 3.7 percent of GDP, in 2027-2028 and underlying debt would have been rising every year.

Many other forecasts have also depicted a bleak future. The Bank of England in early November said that if interest rates were to rise as much as the market expected, GDP would continue to fall throughout 2023 and the first half of 2024. Even without more rate hikes, the economy is still expected to be falling at the end of 2023.

A monthly comparison of independent projections published by the UK Treasury on Wednesday showed an average new forecast of 4.2 percent for UK GDP growth in 2022 and 0.9-percent contraction in 2023.

"Fiscal policy will be tightened materially next year, amplifying the recession already underway," Samuel Tombs, chief UK economist at Pantheon Macroeconomics consultancy, said.

"Britain's recession likely will be the deepest among the major advanced economies, given that no other country has moved so soon to raise taxes and withdraw energy price support," Tombs added. (1 British pound = 1.18 U.S. dollar) 

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