New York, USA (CNN) – The UK has already entered a recession and is battling inflation which has reached its highest levels in decades, eroding the living standards of millions of people across the country. Now, the British are also having to endure higher taxes and cuts to public services as the government tries to put its finances on firmer footing, underscoring the difficult road ahead.
On Thursday, British Prime Minister Rishi Sunak and Finance Minister Jeremy Hunt unveiled their long-awaited budget plan aimed at saving 55 billion pounds ($65 billion).
“Credibility cannot be taken for granted,” Hunt said in a speech to Parliament, reinforcing a “strong commitment” to bolster public finances, which he acknowledged requires “tough decisions”.
The move marks a major turning point for the UK. Less than two months ago, Hunt’s predecessor and former prime minister Liz Terrace said the government would cut taxes and increase lending in a bid to generate growth. But investors rebelled against the unorthodox approach, and Truss resigned after just 45 days in office.
Hunt’s new plan underscores the extent to which the rapidly changing economic environment is forcing governments to adapt, as well as the need for political leaders and central banks to act “hand in hand” at a sensitive time.
For years, the interest rates have been the lowest and the loan has been very affordable. But with central banks aggressively raising borrowing costs in a bid to reduce inflation, this is no longer the case, putting pressure on countries like Britain to show they can manage their debt, even as a deep recession looms. .
Other countries with high debt burdens may have to make equally undesirable choices, said Yael Selvin, chief economist at KPMG UK. “It’s definitely a wake-up call for other governments,” he added.
Britain’s painful plan
The UK said in new forecasts released Thursday that its economy has entered a recession that will last just over a year. The UK economy is expected to contract by just over 2% and won’t return to pre-pandemic size until the end of 2024.
During the downturn, the Balance Sheet Office said real household income is expected to decline by more than 7%, falling to levels last seen in 2013-14. More than half a million people are expected to lose their jobs.
Even so, Hunt said the government should find a way to reduce public debt as a proportion of the UK economy over five years and keep public sector debt below 3% of GDP by then.
To help achieve this, taxes will go up. While “all taxpayers will be required to contribute,” according to the Treasury Department, a big change would put more people in the income tax bracket for top incomes. The threshold at which income is taxed at 45% has been reduced from £150,000 ($177,000) to around £125,000 ($148,000).
The UK also increases its extraordinary taxes on oil and gas companies by introducing a new tax on electricity generators. Hunt previously said the corporate tax rate would rise to 25% from April.
According to the OBR, the UK’s tax burden is on track to reach its highest sustainable level since the Second World War.
In the meantime, public spending will be cut, even if most of the cuts will take place within two years after the next election.
“We have to make tough tax decisions, so we’re going to increase government spending, but we’re going to make it grow slower than the growth of the economy,” Hunt said.
He also said that while Britons would continue to receive support for their energy bills after next spring, the average household should expect to pay £3,000 ($3,541) a year, compared with £2,500 ($2,951).
There is a risk that the recession could last longer than anticipated by the budget office, or that the recovery could be weaker. The Bank of England said the UK could be in a two-year recession. This will require the government to roll back its plans yet again, Sylvain said.
“The main concern is that as we go forward, we could see a slightly worse environment than the Budget Office predicted, so improvements in public finances may not be as rapid,” said Sylvin, noting that markets could become “of nervous again”. .” In this case.
