Rishi Sunak’s new government is about to unveil its autumn budget on Nov. 17, a long-awaited plan that has been rescheduled twice since a so-called mini-budget delivered by the previous government on Sept. 23 wreaked havoc on the country’s finances, reputation, and housing market.
The UK chancellor of the exchequer Jeremy Hunt has to deliver a delicate balancing act between reassuring investors the country is committed to fiscal discipline and protecting Britons who are experiencing the highest inflation in 41 years, as per new data released today.
“If he [Hunt] wants to reassure the markets, he will have to announce early action in the form of a big fiscal tightening. That could deepen and/or lengthen the recession and ultimately create an even bigger fiscal hole,” says Ruth Gregory, senior economist at Capital Economics. “If he tries to minimize the economic pain, he risks unsettling the markets and prompting another surge in gilt yields, which would also worsen the public finances.”
When Hunt took over from Kwasi Kwarteng—days before prime minister Liz Truss resigned after just 44 days in office—the first thing he did was scrap much of his predecessor’s disastrous plan for unfunded tax cuts that many, including the IMF, warned would leave a gaping hole in UK’s treasure chest (which it did).
Prime minister Sunak, a former finance minister himself, retained Hunt in his cabinet and together the two are trying to do damage control to the UK government’s fiscal plans for the medium and long term—which call for a fall in debt as a percentage of GDP—and to the country’s reputation.
Sunak has promised to “put our public finances on a sustainable trajectory.” Meanwhile, Hunt has said all Britons will pay more tax, but the difficult situation will be dealt with progressively. Seeking to distance himself from the pro-rich Trussonomics, Hunt told parliament: “We will be asking those that have more to give more.”
While Hunt claims he wants to shield the most vulnerable from the consequences of rising prices and reduce debt, the expected cocktail of spending cuts and higher taxes worth tens of millions of pounds is unlikely to be an easy one to swallow.
The UK should tax the rich, former Greggs chairman says
“We are now being presented with a false choice about the kind of decisions he has to make ahead of the autumn statement: either everyone must feel further economic pain through tax rises, or we must all shoulder unmanageable cuts to our shared, and much needed, public services. This is not a choice that needs to be made. Before considering tax rises for all, or any cuts to public services, Hunt should look to those who can well afford it to make a greater contribution. Some of us in the UK can afford tax rises—but none of us can afford spending cuts, which result in further hardship and more unrest in society.” —Ian Gregg, who went from shop floor to chairman in his family business.
A Snapshot of UK’s economy and budget
£30 billion ($37.5 billion): damage the Truss and Kwarteng’s mini-budget is estimated to have caused to the UK’s fiscal hole, calculated to be between £50 billion to £60 billion. The pandemic, Russia’s war in Ukraine, and Brexit are other factors to blame
£50 billion: Spending cuts and tax rises Hunt is expected to announce—£30 billion pounds of the former and £20 billion of the latter, two government sources told Reuters on Nov. 7
11.1%: Year-over-year rise in UK’s Consumer Price Index (CPI) in October 2022, the highest since 1981, owing to increase in the costs of consumer goods because of a demand-supply mismatch, household energy tariffs, and petrol costs. The inflation target rate is 2%
16.4%: How much food and non-alcoholic beverage prices rose in the 12 months to October 2022. Inflation for this category is estimated to be the highest since 1977
93%: UK adults who reported a rise in the cost of living in August-September 2022
0.1% to 3%: Interest rate hike by Bank of England since December last year to curb inflation by making the cost of borrowing higher
6 months: duration of Hunt’s energy price guarantee of £2,500 for typical consumption, down to from an initial promise of 2 years
40%: windfall tax Hunt is reportedly planning for excess profits made by electricity generators
5%: speculated increase in council tax, up from the current 3%, putting pressure on households
£1 billion: additional government revenue Hunt is looking to raise by freezing the inheritance tax threshold for another two years
£10 billion: money that could be raised if the government levies 1% annual wealth tax on net assets over £10 million, according to advocacy group Tax Justice UK
Zooming in: London’s looking for help
In a Nov. 11 release, London mayor Sadiq Khan, demanded “immediate help” for Londoners—over half of whom are using less water or energy, struggling financially, and cutting back on non-essential spending.
Khan, who backs calls for a windfall tax on energy company, has several ground-level asks of Hunt’s next budget to help residents in the UK’s capital city:
🥘 provide free school meals to all primary school children
⚡ introduce a ‘Lifeline Tariff’ which will allow a minimum floor of domestic energy use before charges begin for the most vulnerable people in London 🏠grant City Hall the power to freeze private rents in London, which would save people £3,000 over two years.
🎭 provide support for businesses, particularly sectors like hospitality and cultural sectors, which are particularly at risk as households cut spending
🚆 drive economic growth by bringing forward investment for transport schemes, such as the Bakerloo line extension of the underground rail system.
One more thing: The UK is facing a chronic labor shortage
With hundreds of thousands of people leaving the workforce since the pandemic began, businesses are struggling to fill jobs and are having to cut corners by reducing hours. The massive labor squeeze has crippled the growth potential of the economy and weighed heavily on public finances, the Office for Budget Responsibility will say, Bloomberg reports.
Businesses facing constraints and not being able to employ the people they need to is “absolutely something I’ll be talking about” in the budget, Hunt said on Nov. 13.
🚶 Rishi Sunak opted for continuity in his speech and cabinet appointments
🤼♂️ The UK is fighting itself on economic policy