UK push to restore finances means higher taxes, energy bills
Millions of British people face higher taxes and steeper energy bills after the government announced an emergency budget on Thursday aimed at restoring the country’s economic credibility and shoring up its battered public finances.
United Kingdom Treasury chief Jeremy Hunt promised to protect the most vulnerable, including pensioners and those on low incomes, and increase funding for core public services like health and education, even as he imposed ?55 billion (US$65 billion) in tax increases and spending cuts.
Hunt acknowledged he was delivering “a substantial tax increase”, with measures that include higher taxes on top earners and levies on some businesses.
At the same time, Hunt pledged to spend billions of pounds to help consumers pay soaring energy bills, increase welfare benefits and pensions in line with inflation, and maintain investment in energy and infrastructure projects.
Just three weeks after taking office, Prime Minister Rishi Sunak’s government faces the challenge of balancing the nation’s budget while helping millions of people slammed by a cost-of-living crisis, as Russia’s war in Ukraine pushes up energy prices and slows economic growth.
The emergency budget statement aimed to restore the government’s financial and political credibility after former Prime Minister Liz Truss announced ?45 billion (US$53 billion) in unfunded tax cuts that torpedoed investor confidence, sent the pound to record lows against the US dollar, and sparked emergency central bank intervention. Truss was forced to resign six weeks after taking office.
Saying the UK faces “unprecedented global headwinds”, Hunt unveiled the package that he said would help tame inflation and rein in public debt, while bolstering the economy.
“It is a balanced plan for stability, a plan for growth, and a plan for public services,” he told the House of Commons. “It shows that you don’t need to choose either a strong economy or good public services.”
Facing pressure to tap huge profits of oil and gas companies to help fund support for struggling Britons, the government raised its windfall tax from 25 per cent to 35 per cent from January 2024 to March 2028.
Electricity generators also will have to pay a new temporary levy of 45 per cent. Hunt said the taxes combined would raise ?14 billion next year.
Hunt promised to protect public spending on key areas such as health and education, as well as investment in energy and infrastructure projects. But he delayed key decisions, such as whether to stick to the previous government’s promise to increase defence spending to 3.0 per cent of economic output.
Pensioners and people on welfare benefits will see their payments increase in line with inflation, while millions of workers on minimum wage will get a 9.7 per cent increase in April, Hunt said.
Millions of households face higher energy bills, however, when a price cap goes up from ?2,500 a year for the average household to ?3,000 in April.
Opposition Labour Party economy spokeswoman Rachel Reeves dismissed the budget as “more taxes, more inflation, higher mortgages”.
On Wednesday, the Office for National Statistics reported that the annual inflation rate rose to 11.1 per cent in October, a 41-year high, compared with 10.1 per cent in September.
Hunt pointed to pain ahead. He said the independent Office for Budget Responsibility expects inflation would reach 9.1 per cent this year and 7.4 per cent next year, but would start to fall sharply from mid-2023. He said the office judged that the UK is already in a recession.
The economy shrank 0.2 per cent between July and September, according to official statistics, and the Bank of England has predicted a recession that could last as long as two years.
Two quarters of economic contraction is a long-held informal definition of recession, and the one the UK uses. The country doesn’t have an independent body that declares recessions like in the United States and Europe, which use more detailed data to make decisions, such as rising unemployment and job losses. The job market is still strong in all these countries.
With that backdrop, the government will struggle to meet all of the competing demands, said Torsten Bell, chief executive of the Resolution Foundation, a think tank that seeks to improve the living standards of low- and middle-income people.
“The uncomfortable reality is that unless global energy price rises reverse, we will remain poorer as a country than we’d hoped to be,” Bell wrote this week.
The government is facing demands from nurses, police officers, border guards and civil servants who are all clamouring for pay increases as inflation galloped to 11.1 per cent. Welfare recipients and pensioners also are looking for higher payments, and low-income families are calling for an expansion of the free school lunch programme.
But resources are limited, with Sunak facing a shortfall of at least ?40 billion (US$47 billion).
The budget comes against a grim backdrop, with the war in Ukraine, aftershocks from the COVID-19 pandemic and the economic strains of Britain’s exit from the European Union all weighing on the UK economy.
Hunt and Sunak have reversed most of Truss’ policies, while pledging that the government will pay its bills and start reducing debts built up over the past 15 years.
UK public debt ballooned to almost 83 per cent of economic output in 2017, from less than 36 per cent in 2007, as the government bailed out banks and struggled to bolster the economy. A decade of budget tightening had started to reduce the burden when the COVID-19 pandemic and war in Ukraine pushed debt to 98 per cent of gross domestic product. That is the highest since 1963, when Britain was still recovering from World War II.
But some economists caution against moving too fast to reduce government debt at a time when rising food, energy and housing costs are set to wipe out the savings of a fifth of British households.
– AP