Written November 16, 2022 4:37 p.mUpdated on November 17, 2022, at 15.08.
After Liz Truss’ “mini-budget” (actually a mega-spending plan), here comes the era of “austerity 2.0”. This is the name given by the English media to the budget announcements expected in the United Kingdom, referring to the Cameron years when public services were cut.
The new Chancellor of the Exchequer, Jeremy Hunt, who arrived amid a financial storm a month ago, is due to present on Thursday his plan to get Britain’s public finances back on track, damaged by the program of tax cuts from £45bn. unfunded from its predecessor.
A balancing act that consists of restoring investor confidence without destroying what is left of growth, and which represents a major test of the credibility of the new British government. As the UK has just suffered its first quarter of GDP decline since the pandemic, the Bank of England has warned that the recession could last until 2024.
Inflation at 11.1%
In such circumstances, the government should in theory pursue a stimulus policy. That is impossible in the UK, at the risk of running rampant inflation. According to figures released by the Office for National Statistics (ONS) on Wednesday, consumer price inflation reached 11.1% in October, a level not seen since October 1981.
With wages not keeping pace, UK households are suffering an even greater loss of purchasing power than during the financial crisis: in real terms, wages fell by 2.7% in the third quarter, according to the NSO.
Since Liz Truss’ budgetary mistakes, the situation has calmed down in the financial markets. The yield on 10-year government bonds at 3.2% returned to pre-“mini-budget” levels.
But the new forecasts to be published on Thursday by the Office for Budget Responsibility (OBR), the government’s budgetary watchdog, could require massive intervention to reduce the deficit. According to the “Financial Times”, the OBR will significantly lower growth forecasts, which could bring the public deficit in the UK to 100 billion pounds in 2026-2027.
Budget screwed up
Jeremy Hunt is thus preparing to announce a budget consolidation of around £54 billion, including £24 billion in tax increases and £30 billion in public spending cuts.
On the menu of tax rises is freezing income tax rates, which could bring in £5 billion a year due to high inflation, as well as rising capital gains tax. The threshold for the tranche above 45% could be lowered from £150,000 to £125,000 to get the wealthiest to contribute. The extraordinary tax on oil tankers could be raised and extended to include all electricity producers.
On the expenditure side, the measures promise to be painful. Knowing that the health and defense budgets have been sanctified, and that the government has committed to increasing social benefits and pensions in line with inflation, the cuts should be all the more brutal for the other public services. There is talk of limiting the increase in public spending to 2% per year, a challenge when inflation exceeds 10%.