LONDON, Nov 17 (Reuters) – Britain’s economy is forecast to shrink next year, finance minister Jeremy Hunt said as he began outlining how he and Prime Minister Rishi Sunak will raise taxes and cut spending to repair the public finances, despite the grim outlook.
The new forecast is for gross domestic product to contract by 1.4% next year compared with a projection for growth of 1.8% in the previous outlook published in March by the Office for Budget Responsibility (OBR).
Since then, Britain’s economy has come under strain from an inflation rate now above 11%, a slowing global economy and political and severe financial market volatility during Liz Truss’s brief term as prime minister.
Hunt said the OBR forecasts laid out “starkly the impact of global headwinds on the UK economy” as he started a speech to parliament on Thursday.
The OBR forecast gross domestic product would grow by 1.3% in 2024 and by 2.6% in 2025, Hunt said, compared with its previous forecasts for growth of 2.1% and 1.8% respectively.
Hunt and Sunak have said they will restore investor confidence in Britain after the failed “Trussonomics” experiment with unfunded tax cuts that sent the pound to an all-time low against the U.S. dollar, threatened chaos in the housing market and forced Truss to quit after just 50 days in Downing Street.
Hunt said the OBR judged that Britain – where high inflation is creating a cost-of-living crisis – is already in recession. It is the only Group of Seven nation yet to recover its pre-pandemic size, having previously suffered a decade of near-stagnant income growth.
Hunt had warned of more pain in his budget statement in the days leading up to Thursday’s announcement.
He has said he can only slow the rise in borrowing costs if he can show investors that Britain’s 2.45 trillion-pound ($2.91 trillion) debt mountain will start to fall as a share of economic output.
Critics have warned against a return to the kind of tight controls on spending pursued by the ruling Conservative Party for much of the past 12 years, saying it will hurt already stretched public services and the lives of millions of households, deepening the expected recession in the process.
The British government announced on Thursday plans to freeze income tax allowances and lower the threshold at which people start to pay the highest rate of income tax, in order to stabilise the public finances.
Finance minister Jeremy Hunt said he would freeze income tax allowances until 2028 and was lowering the threshold above which the 45% top rate of income tax is paid to 125,140 pounds ($148,053) from 150,000 pounds.
“Even after that, we will still have the most generous set of tax-free allowances of any G7 country,” Hunt told parliament in a speech on the public finances aimed at restoring market confidence in the government’s finances after the 50-day premiership of Liz Truss.
Her government had said it would abolish the top rate of income tax, before reversing course amid financial turmoil triggered by her plans. She was forced to resign last month and was replaced by Rishi Sunak as prime minister.
LONDON, Nov 17 (Reuters) – British finance minister Jeremy Hunt set out plans to cut spending and increase taxes as he delivered his Autumn Statement on Thursday.Below are the key quotes:
ON THE CHALLENGE AHEAD:
“Today we deliver a plan to tackle the cost-of-living crisis and rebuild our economy. Our priorities are stability, growth, and public services. We also protect the vulnerable because to be British is to be compassionate and this is a compassionate Conservative government.”
ON THE BANK OF ENGLAND
“The Bank of England, which has done an outstanding job since its independence, now has my wholehearted support in its mission to defeat inflation and I today confirm we will not change its remit.
“But we need fiscal and monetary policy to work together – and that means the government and the Bank working in lockstep. It means, in particular, giving the world confidence in our ability to pay our debts.”
ON INFLATION FORECASTS
“The OBR forecast the UK’s inflation rate to be 9.1% this year and 7.4% next year. They confirm that our actions today help inflation to fall sharply from the middle of next year. They also judge that the UK, like other countries, is now in recession.”
ON GROWTH/UNEMPLOYMENT/DEBT FORECASTS
“Overall this year, the economy is still forecast to grow by 4.2%. GDP then falls in 2023 by 1.4%, before rising by 1.3%, 2.6%, and 2.7% in the following three years. The OBR says higher energy prices explain the majority of the downward revision in cumulative growth since March. They also expect a rise in unemployment from 3.6% today to 4.9% in 2024 before falling to 4.1%.”
“They also expect a rise in unemployment from 3.6% today to 4.9% in 2024 before falling to 4.1%.”
“Today’s decisions mean that over the next five years, borrowing is more than halved. This year, we are forecast to borrow 7.1% of GDP or 177 billion pounds; next year, 5.5% of GDP or 140 billion pounds; then by 2027-28, it falls to 2.4% of GDP or 69 billion pounds.
“As a result, underlying debt as a percentage of GDP starts to fall from a peak of 97.6% of GDP in 2025-26 to 97.3% in 2027-28.”
ON NEW FISCAL RULES
“I also confirm two new fiscal rules: the first is that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period. The second, that public sector borrowing, over the same period, must be below 3% of GDP. The plan I’m announcing today meets both rules.”
ON TAX RISES
“Asking more from those who have more means that the first difficult decision I take on tax is to reduce the threshold at which the 45p rate becomes payable from 150,000 pounds to 125,140 pounds. Those earning 150,000 pounds or more will pay just over 1,200 pounds more a year.”
“I am maintaining at current levels the income tax personal allowance, higher rate threshold, main national insurance thresholds and the inheritance tax thresholds for a further two years taking us to April 2028.”
“The dividend allowance will be cut from 2,000 pounds to 1,000 pounds next year and then to 500 pounds from April 2024. The Annual Exempt Amount for capital gains tax will be cut from 12,300 pounds to 6,000 pounds next year and then to 3,000 pounds from April 2024.”
ON WINDFALL TAXES
“From January 1st until March 2028 we will increase the Energy Profits Levy from 25% to 35%.
“The structure of our energy market also creates windfall profits for low-carbon electricity generation so, from January 1st, we have also decided to introduce a new, temporary 45% levy on electricity generators. Together these taxes raise 14 billion pounds next year.”
ON DEFENCE SPENDING/ FOREIGN AID BUDGET
“We will continue to maintain the defence budget at least 2% of GDP to be consistent with our NATO commitment.
“The OBR’s forecasts show a significant shock to public finances so it will not be possible to return to the 0.7% target until the fiscal situation allows. We remain fully committed to the target and the plans I have set out today assume that ODA spending will remain around 0.5% for the forecast period.”
ON ENERGY PLANS
“By 2030, we want to reduce energy consumption from buildings and industry by 15%. Reducing demand by this much means, in today’s prices, a 28 billion pound saving from our national energy bill or 450 pounds off the average household bill.
“In this Parliament, we’re already planning to invest, in energy efficiency, a total of 6.6 billion pounds. Today, I’m announcing new funding, from 2025, of a further 6 billion pounds – doubling our annual investment to deliver this new national ambition.”
“From April, we will continue the Energy Price Guarantee for a further 12 months at a higher level of 3,000 pounds per year for the average household. With prices forecast to remain elevated through next year, this will still mean an average of 500 pounds support for every household.”
ON PENSION/BENEFITS SUPPORT
“I also commit to uprate such benefits by inflation with an increase of 10.1%. That is an expensive commitment costing 11 billion pounds.
“To support the poorest pensioners, I have decided to increase pension credit by 10.1% which is worth up to 1,470 pounds for a couple and 960 pounds for a single pensioner in our most vulnerable households.”
“In April, the state pension will increase in line with inflation, an 870 pounds increase which represents the biggest ever cash increase in the state pension.
ON EDUCATION/HEALTH SPENDING
“I can announce today that next year and the year after, we will invest an extra 2.3 billion pounds per year in our schools.”
“I will increase the NHS budget, in each of the next two years, by an extra 3.3 billion pounds.”
MARKET REACTION:
STOCKS: The FTSE 100 .FTSE was down 0.5%, while the mid-cap FTSE 250 .FTMC dropped 0.2%, from a loss of 0.4% earlier in the day.
FOREX: Sterling GBP=D3 fell 0.9% against the dollar to $1.1809 from $1.1845 prior to the budget.
MONEY MARKETS: Interest rate futures were pricing a peak in Bank of England rates of 4.54% by next August, from a peak of 4.59% prior to Hunt’s speech. 0#BOEWATCH
COMMENTS:
SUSANNAH STREETER, SENIOR INVESTMENT AND MARKETS ANALYST AT HARGREAVES LANSDOWN, LONDON:
“In general, there had been some expectations that the axe would be wielded more dramatically by Jeremy Hunt in terms of spending cuts and it’s difficult to know exactly what’s moving the pound. But you know there’s still is concern about the long term health of the UK economy, whether there will be enough in what the chancellor is saying for longer term growth prospects.”
JOHN WOOLFITT, DIRECTOR OF TRADING AT ATLANTIC CAPITAL MARKETS, LONDON:
“There’s been a few sort of notable developments, the windfall taxes which a lot of people will be very happy with, stamp duty cuts as well, the electric cars now having vehicle excise duty coming in from 2025 will be interesting.
But overall, it reads quite comfortable. We needed somebody with a steady hand and steady view to deliver a budget that does actually show an explanation as to why things are being done and what the impact will be really.
It’s a budget that really sets out in the best way they can to defend maybe the lower earners or the more vulnerable in our population.”
GILES COGHLAN, CHIEF MARKET ANALYST, HYCM, LONDON:
“It’s not fantastic news, but it’s not as bad as the previous mini-budget that had unbudgeted spending followed by a bond sell-off in panic.
This is careful financial conservatism, which is reassuring. Markets that have been expecting this for some time. The balance of borrowing and public sector spending is roughly what the markets have been expecting. So I think it probably as good as it gets.”
PATRICK ARMSTRONG, CHIEF INVESTMENT OFFICER, PLURIMI WEALTH, LONDON:
“I don’t think there’s anything that should be too surprising. The economic outlook is poor for United Kingdom, it’s got a lot of debt and the Bank of England hiking interest rate. Costs are going up as a percentage of GDP as well, so It’s not a good news picture of a good strong economic outlook when you’re facing a lot of debt but there’s more many choices to be made, many good choices.”
MARCUS BROOKES, CHIEF INVESTMENT OFFICER AT QUILTER INVESTORS, LONDON:
“Today’s Autumn Statement has painted a bleak picture for the UK… Markets originally reacted well to the steady hand of Jeremy Hunt. They will continue to give him the benefit of the doubt and see the impact of this plan, however, there is also a chance that they see this as an overcorrection and that the measures could stifle what economic growth was present. The government will be hoping that these measures are merely temporary in order to stabilise the ship ahead of an election in just two years’ time.”
For investors, the UK remains somewhat of a difficult place to judge right now. We are not necessarily at the end of the train of bad news and with a prolonged recession priced in we may need to wait for a more sustained downward path of inflation.”
STUART COLE, HEAD MACRO ECONOMIST AT EQUITI CAPITAL, LONDON:
“The pound is suffering as more of the budget black hole is coming from tax hikes rather than spending cuts. It will be just under half from tax hikes now whereas I think the expectation previously was more would come from spending cuts. That will hit consumer spending.
A lot of tax rises are coming from windfall taxes, allowance changes etc. It is very political, as it avoids the headlines that the government has put up headline tax rates.”
MICHAEL HEWSON, CHIEF MARKETS STRATEGIST, CMC MARKETS, LONDON:
“We’re still absorbing it really. They’re saying: ‘it’s going to hurt.’ Yes, it is. But until we pick through the fine print, it’s hard to say.”
I’m not sure that it’s all necessary, but a lot of it is priced in and we have to see if it gets through the Commons.”
SIMON HARVEY, HEAD OF FX ANALYSIS, MONEX EUROPE, LONDON:
“The austerity’s going to be welcome (to the Bank of England) purely because there’s going to be less support for UK consumers. But with regards to their inflation battle… they still have a way to go here.
We’re looking for a terminal (interest) rate around 4%.
In the short term we’re still looking at a break (for sterling) below $1.18 in the coming days.”
