February 2, 2023

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Great Britain flips the pages of “Trussonomics” with its budget plan. From Reuters

©Reuters. Britain’s Chancellor of the Exchequer Jeremy Hunt leaves his home in London, Britain November 16, 2022. REUTERS/Toby Melville

By William Schomberg

LONDON (Reuters) – Treasury Secretary Jeremy Hunt is on Thursday to bury Britain’s failed ‘trussonomics’ experiment by cutting spending and raising taxes.

The UK is likely already in recession as 11% inflation triggers a cost of living crisis. It is the only country in the Group of Seven to regain its pre-pandemic size, having previously suffered a decade of near-stagnant income growth.

But Hunt warned in his budget statement of further pain that will mark an abrupt reversal in policy from the unfunded tax cuts promised by former Prime Minister Liz Truss.

Her government’s short-lived ‘mini-budget’ on 23 September sent the pound to an all-time low against the US dollar, threatening chaos in the housing market and forcing Truss to retire from Downing Street after just 50 days.

Investors found solace when Hunt was appointed in mid-October to steer the economy back onto a more orthodox path.

He and Sunak say they must go further now.

“Stability has returned to the UK but that is because the government is expected to make these difficult but necessary decisions,” Sunak said this week.

Critics say a return to austerity is unnecessary, will hurt millions of households and deepen the expected recession.

According to news reports, the plan, which is due to be announced around 11:30 am (1130 GMT), will include inflation-linked increases in welfare payments and pensions after concerns were raised about smaller increases.

There would also likely be help for the poorest households to pay their energy bills when an existing cap expires and is replaced by a less generous one in April, the reports said.

But Hunt says the only way he can stem the rise in borrowing costs is to show investors that Britain’s £2.45 trillion ($2.91 trillion) debt as a share of economic output is beginning to decline. Fighting inflation is key.

“The Bank of England has my full support in its mission to beat inflation… but we need fiscal and monetary policies to work together,” Hunt said, excerpting his speech.

TAX COLLECTIONS AND SPEND CUTS

The UK government is targeting annual savings of more than £50 billion over five years – the equivalent of around 2% of annual economic output. How quickly spending cuts and tax increases come will be crucial to the short-term economic outlook.

The Times said most of the spending cuts are planned after the next election, expected in 2024, and may not be needed if the economy improves.

Hunt risks rekindling tensions within the ruling Conservative Party, many of whom are already angry at the level of Britain’s tax burden.

It is intended to extend the freeze on income tax thresholds and thus draw more people online. Newspapers said he would lower the threshold for paying the higher income tax rate by 16% to £125,000 a year.

Hunt also plans to rake in more dividend and capital gains tax revenue, according to news reports, while sources said he is considering a large increase in the windfall tax for oil and gas companies and extending it to power generation companies.

Fresh spending cuts could add to public frustration at overstretched public services ranging from a lagging health care system to run-down public housing.

Adjusted for inflation, budgets for many departments were cut below 2010 levels, with transportation spending down about 40% and the judiciary down 20%, the Institute for Fiscal Studies think-tank estimates.

Opinion polls show that the opposition Labor Party has a large lead in opinion polls.

The budget statement is accompanied by forecasts from the Office for Budget Responsibility, which likely reflect the BoE’s message that the UK is headed for a long recession.

Hunt has announced that he will tackle one of the pressures on the UK economy, namely the lack of workers in the labor market.

The Financial Times said he would announce reform that would allow insurance companies to invest billions of pounds in green energy and other infrastructure projects.