UK budget: Britain brings austerity back. Here’s why


London
CNN business

The last time a UK finance minister unveiled tax and spending plans, Markets went haywire and finally the Prime Minister of the country lost her job. The new government is not aiming for a repeat.

On Thursday, Chancellor Jeremy Hunt will present a budget aimed at restoring confidence in the UK’s ability to manage its public finances. But that might be easier said than done.

The country stares down the barrel of one grueling recessionand investors remain as nervous interest rates rise. That requires Hunt, who recognized Britain faces “extremely difficult” decisionsto accomplish a delicate balancing act.

According to media reports, the government wants to raise between £50 billion and £60 billion ($70 billion) through a mix of tax hikes and spending cuts, much of which may not take effect until after the next election in 2024.

“If you do too much too soon, you risk making the recession worse,” said Ben Zaranko, a senior research economist at the Institute for Fiscal Studies. “If you postpone everything until after the next election, you risk not being seen as credible.”

A fresh wave of austerity could help restore the government’s reputation in financial markets after former Prime Minister Liz Truss’ budget – which included an unorthodox combination of big tax cuts and increased borrowing – was restored. unleashed panic.

But it will do little to allay fears about the country’s bleak economic outlook. The UK is one of two G7 economies to have contract in the third quarter. It is now smaller than before the Corona pandemic. The Bank of England is forecast a protracted recession that could stretch into 2024.

New cuts could make matters worse. When the government passed an austerity program in 2010 after the Great Recession, it was 1% of the country’s GDP saved, according to the British household watchdog. Just four years ago, former Prime Minister Theresa May pledged to bring nearly a decade of austerity to an end.

Now, tax hikes could further depress consumer confidence—already now near a record low — and spending cuts could further strain public services, which are already under tremendous pressure.

Nevertheless, Hunt wants to show that he has a plan to reduce the national debt in relation to GDP in the medium term. It is currently at 98%. The Bureau of Fiscal Responsibility said in July it could reach nearly 320% in 50 years.

“We’ve got to make some tax increases, some spending cuts if we’re going to show that we’re a paying country,” Hunt told Sky News on Sunday.

How did the UK get here? There is no shortage of pointers.

Part of the problem is global. Interest rates have risen rapidly around the world as central banks try to curb inflation. This has pushed up borrowing costs for the government and came as a shock after years when money was cheap.

At the same time, skyrocketing energy costs, exacerbated by Russia’s war in Ukraine, have forced governments to step in to cushion the blow of crippling energy bills – shortly after spending significant sums to help homes and businesses through the pandemic.

Hunt has scrapped plans to cap energy bills for typical households at £2,500 ($2,981) over the next two years. Instead, support is only guaranteed until next spring. But the measures will still prove costly.

However, the government cannot blame the rest of the world for all of its problems.

“You can just look at how the UK compares to every other country in Europe and it’s obvious there’s a UK-specific element,” Zaranko said.

The UK’s exit from the European Union burdened trade and exacerbated labor shortages in key industries. It has also contributed to the depreciation of the pound – by around 20% against the US dollar since the Brexit vote in 2016 – which has fueled inflation by pushing up the prices of imports.

“The UK economy as a whole has been permanently damaged by Brexit,” said former Bank of England official Michael Saunders said Bloomberg TV in this week. “If we hadn’t had Brexit, we probably wouldn’t be talking about an austerity budget this week. The need for tax increases, spending cuts would not be there.”

And while inflation in the US slowed more-than-expected in October, falling to 7.7%, in the UK it is still rising sharply and is on track 41-year high of 11.1% Last month.

That fuels expectations that the Bank of England will need to keep raising interest rates and could keep them high for longer, although the recession could make those forecasts difficult.

The country’s labor market also remains extremely tight, with an employment rate lower than before the coronavirus outbreak and a record number of people not working due to a long-term illness.

“Britain’s distinctive feature was that the labor supply was very constrained, perhaps more so than other countries,” said Ruth Gregory, senior UK economist at Capital Economics.

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