Yesterday the UK Chancellor of the Exchequer Jeremy Hunt announced his Autumn Statement in Westminster, he had three clear goals in mind: stabilise the economy, tackle inflation and restore the UK’s global and financial credibility. The Chancellor had been briefing all week that there was going to be pain, and he certainly didn’t disappoint on that front, with Britain expected to face the highest level of taxation since the Second World War and the biggest fall in living standards since records began.
did he announce?
In short, Hunt announced tax rises and public sector spending cuts totalling around £55bn which he hopes will help tackle the UK’s cost of living crisis. Inflation is what he needs to shift on this front, with the Chancellor suggesting that it will peak this December at 11.1% before dropping in six months and being minimal in less than three years. In the meantime, the impact on living standards is going to be significant with The Resolution Foundation calculating that household incomes are set to fall by £1,700 over the next two years.
good news from the OBR?
Eh not really, the official forecast from the Office of Budget Responsibility (OBR), which went missing from Kwarteng’s mini-Budget, suggest the economy has been growing by 4.2% this year but that it is now in recession and forecasted to shrink by -1.4% in 2023. That means less tax rolling in from VAT, an increase in government spending to service its interest debt and more spending on benefits as the recession takes hold and unemployment rises.
We are also now starting to see the impact of the Government spending during the pandemic which totalled £318bn and will now include £177bn in Government spending this year as the UK enters recession.
Hunt has chosen a fiscal target of getting debt falling as a share of the economy five years from now which is not an economic necessity but a political choice to show financial discipline and credibility.
To hit that target he needs, £55bn of spending cuts or tax rises but the timing is key. If he raises taxes or cuts spending too soon, it can make the recession deeper but less so if he taxes windfall profits and the wealthy. The windfall tax on energy company profits will go from 25% to 35% and there will be a 45% tax on electricity generators who have also been making big profits. The Times also reports that fuel duty is expected to rise by 23% next year, which will impact car driving commuters across the country.
Telegraph commentators are aghast that he has focused a lot of financial support on lower income families, including a commitment to raise pensions and working age benefits by 10.1% and a 9.7% increase in the national minimum wage. There’s also more help with bills for benefit recipients with the energy price guarantee extended by 12 months. One Conservative MP was said to have muttered “what is the point of the Conservative Party anymore?”.
are the brains saying?
Dr Gemma Tetlow, Chief Economist for The Institute for Government, explained how the “outlook looks bleak” despite the support Hunt has extended in his Autumn Statement. The big challenge that we are facing is that inflation and energy prices are “dragging” on UK growth and the government is looking to households to cover the damage. Ultimately, there was a limit to the amount that the Chancellor could do to soften the blow.
Director Paul Johnson from the Institute for Fiscal Studies echoed these words explaining, “the next few years look grim in terms of living standards, the biggest reduction in household living standards, the biggest reduction in household incomes, possibly on record and certainly within recent generations.” However, the noticeable difference from today’s announcement is the shift in helping households with lower income which shows a much more targeted form of help that has not been seen in previous policy, the rise in the national minimum wage is an example of this in action.
do we go from here?
The Chancellor’s plans do look credible, but they are also laced with political risk with the Labour Party shouting that we are entering an austerity “worse than in 2010”. The details on the Government’s spending cuts are also very vague, once these start to bite the political, media and public response will likely become more vocal.
Hunt’s banking that after a few tough months the UK will return to stability and sense, however if the last 12 months are anything to go by, I would say he’s dreaming.