UK's Hunt increases taxes and tightens spending controls in a tight budget

    photo: REUTERS/Peter Nicholls

British finance minister Jeremy Hunt announced a string of tax increases and tighter public spending in a tough budget plan on Thursday that he said was needed after the blow dealt to the country's fiscal reputation by former prime minister Liz Truss.

Hunt told parliament that the economy was already in recession and was forecast to shrink next year but there was no way to avoid painful fiscal medicine to ensure Britain could build on the recent restoration of calm in financial markets.

He stated, "Credibility cannot be taken for granted and yesterday's inflation results demonstrate that we must continue a persistent struggle to bring it down, including a crucial commitment to repair the public finances.

Hunt announced changes to the tax code that will result in a higher percentage of persons paying basic income tax, a lower threshold for paying the top rate of income tax, and a reduction in tax-free dividend allowances.

He postponed until 2028 the date at which employers must begin making social security contributions, increasing the amount that businesses will have to pay.

According to Hunt, a new temporary 45% tax on electricity generators and an increase in the tax on energy company earnings from 25% to 35% from Jan. 1 until 2028 will raise a total of 14 billion pounds in 2018.

An unfavourable economic outlook is the background to the tightening of the purse strings.

The independent Office for Budget Responsibility's prior prediction from March projected growth of 1.8% for the GDP, but this time around, it predicts a contraction of 1.4%. (OBR).

Since then, the weakening global economy, an increase in inflation, and a period of extreme financial market volatility during Truss's brief tenure as prime minister have all put pressure on the British economy.

The OBR predictions, according to Hunt, "starkly lay out the impact of global headwinds on the UK economy."

In contrast to its prior projections of growth of 2.1% and 1.8%, respectively, Hunt stated that the OBR estimated GDP would expand by 1.3% in 2024 and by 2.6% in 2025.

He claimed that the OBR predicted inflation would be 9.1% in 2022, up from its March forecast of 7.4%, and 7.4% the next year, up from an earlier prediction of 4.0%.

Following Truss's unsuccessful experiment with unfunded tax cuts, Hunt and Sunak have promised to restore investor faith in Britain.

She left Downing Street after just 50 days because of her policies, which caused the pound to reach an all-time low versus the US dollar, threatened market instability in the property sector, and necessitated intervention from the Bank of England to support the bond markets.

According to Hunt, the OBR determined that Britain, whose high inflation is causing a crisis in the cost of living, is already in a recession.

It is the only economy in the Group of Seven that has not yet grown to its pre-pandemic level after experiencing a decade of almost flat revenue growth.

Prior to Thursday's announcement, Hunt had cautioned that he could only prevent a rise in borrowing costs by demonstrating to investors that the UK's 2.45 trillion-pound ($2.91 trillion) debt mountain will begin to decline as a share of GDP.

According to the OBR's predictions released on Thursday, the goal would be reached in the fiscal year 2027–2028.

Critics have cautioned against a return to the strict spending restrictions that the ruling Conservative Party pursued for a large portion of the previous 12 years, claiming that such a move would harm the lives of millions of households and already overburdened public services while also deepening the anticipated recession.