The British government is launching a new period of austerity to restore market confidence

The British government is launching a new period of austerity to restore market confidence
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Chancellor of the Exchequer Jeremy Hunt arrives at the back entrance of Downing Street, London.

Aaron Chown – Pa Images | Pa Images | Getty Images

LONDON – Britain’s new finance minister, Jeremy Hunt, must weigh the country’s economic peril against his party’s political survival when he delivers his long-awaited financial report on Thursday.

Hunt is expected to announce tax increases and spending cuts of between 50 billion pounds ($58.85 billion) and 60 billion pounds a year as he seeks to shore up the market with his own finances while trying to plug a significant hole in the country’s public finances. fiscal confidence after chaos released by Former Prime Minister Liz Truss’ disastrous ‘mini budget’ in late September.

The Bank of England predicted that The UK is at the start of its longest recession on recordand the Office for National Statistics confirmed on Friday that GDP contracted by 0.2% in the third quarter of 2022.

The Bank is also trying to bring inflation back from its target The highest level of 40 years was seen in September with 10.1%and earlier this month it imposed its biggest increase in interest rates since 1989.

“We will see everyone pay more tax. We will see a reduction in costs,” Hunt told the BBC on Sunday, as he promised the government would present a new and more focused plan to help households with their energy bills after April.

Reports suggested that many of the most radical austerity measures planned by new prime minister Rishi Sunak’s government would come into force from 2025, after the next general election.

UK finance minister Hunt faces tough challenge between economics and politics: JPMorgan's Gimber

“The government and the Bank of England find themselves in a very difficult position because the choice for the chancellor next week is not about what happens – he has already told the market that the debt forecast needs to be lowered. The next few years – it’s more time,” JPMorgan Asset Management’s global markets strategist Hugh Gimber told CNBC on Friday.

He added that Hunt faces a key decision between risking prolonging the crisis and front-loading the pain of the Sunak government’s pledge to rebalance the economy and delay the main impact of new measures to avoid further political damage.

“You can make a strong case economically at the moment to front-load it, push it forward, reduce the amount the Bank of England has to do to slow the economy, but politically, there’s obviously a tough challenge there,” Gimber said.

Most polls in recent weeks have given the mainstream Labor Party a roughly 20-point lead over Sunak’s ruling Conservatives, reflecting the damage done during Truss’s 45 days in office and a range of opposition. scandals that plagued his predecessor, Boris JohnsonSunak was not swayed by his promise to return to financial security.

Cost reduction vs. tax increases

Thursday’s statement will be accompanied by a long-awaited set of forecasts from the UK’s independent Office for Budget Responsibility (OBR), and after the Bank of England’s bleak outlook a few weeks ago, economists expect an equally bleak picture to emerge.

In a Monday note, Deutsche Bank The OBR said it was likely to project a “deep and protracted recession” in 2023, with growth stalling until 2025 at the earliest and inflation forecasts rising significantly to reflect more sustained price rises.

Deutsche also expects the OBR to forecast a slow recovery from the country’s tight labor market, with unemployment rising to around 5.5-6% over the next two to three years.

A former Treasury official says the UK's financial case

Deutsche Bank’s UK CEO: “Despite this, the challenging economic outlook is likely to underline the size of the funding hole, with our borrowing forecasts rising to just above GBP 90bn in 2026/27 (OBR Spring Statement. 32 billion GBP),” said Economist Sanjay Raja.

Raja expects spending cuts and tax rises to be split 60:40 in Hunt’s plans, although he said they would be done “in stealth”, with tax rises aimed at freezing personal allowances and tax bands, lowering the additional tax rate threshold below £150,000. Up to £125,000 to generate more revenue for the Treasury.

Away from “hidden taxes”, we expect a few more options to be announced
Thursday. Firstly, raising council tax with local authorities allowed the level of council tax to rise above 3% without a referendum,” said Raja.

“Secondly, increasing both the duration and scale of the oil and gas “surplus profit” tax.”

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In total, Deutsche predicts the “fiscal drag” from hidden taxes and higher windfalls, given high inflation and energy prices, will cost the Treasury about £35 billion.

Again, spending cuts implemented through “stealth” could take the form of “nominal cash freezes on departmental budgets,” Raja said, with spending budgets increased minimally going forward.

“The budget plans are also likely to be cut over the coming years and ‘efficiency savings’ will be included as part of the chancellor’s plans to plug the financial gap,” Raja said.

“This will help offset some of the expected cost growth with welfare and pension payments, which may increase due to inflation rather than income growth.”

The market awaits with bated breath

The market dismissed former finance minister Kwasi Kwarteng’s announcement of tax cuts in September. sterling slipped to an all-time low and government bond yields rose so fast that the Bank of England was forced to step in and prevent the collapse of pension funds.

“If he wants to calm the markets, he will have to announce early action in the form of major fiscal tightening. This could deepen and/or prolong the recession and ultimately create an even bigger fiscal hole,” said Ruth Gregory, senior UK official. Economist at Capital Economics.

“If he tries to minimize the economic pain, he risks unsettling the markets and causing another fallout in gilt yields, which will worsen public finances.”

Capital Economics expects Hunt to unveil £54bn of fiscal tightening measures, around 1.9% of GDP, but this would need to be funded primarily by more nuanced tax increases rather than spending cuts. most policies “start sooner rather than later,” Gregory said.

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