The British government is ushering in a new era of austerity in an effort to restore market confidence

LONDON (Reuters) – Britain’s new finance minister, Jeremy Hunt, must weigh the economic risk to the country against the political survival of his party on Thursday as he delivers a long-awaited financial statement.

Hunt is expected to announce tax hikes and spending cuts of between £50 billion ($58.85 billion) and £60 billion a year, as he tries to plug a huge hole in the country’s public finances, while reassuring the market Financial credibility after the chaos previously unleashed The disastrous “small budget” of former Prime Minister Liz Truss in late september.

The Bank of England I expected that The UK is at the beginning of its longest recession everOn Friday, the Office for National Statistics confirmed that the gross domestic product contracted by 0.2% in the third quarter of 2022.

The bank is also trying to fight inflation down to target a 40-year high of 10.1% in SeptemberAnd earlier this month it imposed the largest increase in interest rates since 1989.

“We will see everyone pay more taxes. We will see spending cuts,” Hunt told the BBC on Sunday, while also promising the government would introduce a new, more focused scheme to help with household energy bills beyond April.

Reports have indicated that many of the more drastic austerity measures outlined by the new Prime Minister Rishi Sunak’s government will come into effect from 2025 onwards, after the next general election.

“The government and the Bank of England find themselves in a very difficult position, because next week’s choice of chancellor is not so much about what happens – it has already told the market that the debt outlook has to come down during the course of the year,” Hugh Gember, global markets analyst at JPMorgan Asset Management, told CNN. NBC on Fridays, in the next few years – it’s rather the timing.

He added that Hunt faces a key decision between taking on the pain the Sunak government has pledged to rebalance the economy and delaying the significant impact of the new measures in order to prevent further political damage, which could prolong the crisis.

“Right now, you can make a strong economic case to say front load, forward load, reduce the amount that the Bank of England has to do in terms of trying to slow the economy, but politically there’s clearly a tough challenge there,” Jemper said. .

Most opinion polls in recent weeks have given the main opposition Labor Party a lead of around 20 points over Sunak’s ruling Conservatives, suggesting the damage done under Truss’s 45-day period, the chain of The scandals that plagued her predecessor, Boris JohnsonIt was not undone by Sunak’s promise of a return to financial credibility.

Spending cuts in exchange for tax increases

Thursday’s statement will be accompanied by a long-awaited set of forecasts from the UK’s independent Office for Budget Responsibility (OBR), and after the Bank of England’s bleak outlook two weeks ago, economists expect a similarly bleak picture.

In Monday’s note, Deutsche Bank The balance sheet office said it is likely to expect a “deep and prolonged recession” in 2023, with growth remaining subdued until 2025 at the earliest, and inflation expectations rising significantly to reflect continued price increases.

Deutsche also expects the BBO to predict a slow recovery to the country’s tight labor market, with unemployment rising to around 5.5-6% over the next two to three years.

“Overall, the challenging economic outlook is likely to underscore the main reason for the size of the fiscal gap, with our borrowing projections of just over £90bn in 2026/27 (OBR spring statement. £32bn),” Deutsche Bank UK President . said economist Sanjay Raja.

Raja expects a 60:40 split of spending cuts and tax increases in Hunt’s plans, although he said this would be done in “stealth”, with the tax increases focused on a freeze on personal allowances and tax bands, while reducing the extra tax rate limit from £150,000. . to £125,000 in order to generate further income for the Exchequer.

Beyond ‘stealth taxes’, we expect to announce two additional options
Thursday. First, the council tax increase with the local authorities allowed the council tax level to be raised above 3% without a referendum.”

And secondly, increasing the duration and size of the unexpected tax on oil and gas “excess profits.”

In total, Deutsche expects that the “fiscal drawdown” from stealth taxes and unexpectedly high taxes will net the Treasury around £35 billion given rising inflation and energy prices.

Raja said the spending cuts, again being implemented by “stealth”, could take the form of a “symbolic cash freeze on departmental budgets”, with spending budgets being increased to a minimum in the future.

“CAPEX plans are also likely to be curtailed over the coming years and ‘efficiency savings’ are likely to emerge as part of the advisor’s plans to bridge the financial gap,” Raja said.

“This will help offset some of the expected spending increases with welfare and pension payments now more likely to be outpaced by inflation than earnings growth.”

The market is looking forward to it

The market flatly rejected the fiscal announcements of tax cuts in September from former Finance Minister Kwasi Kwarting, with Sterling pound Sliding to an all-time low Government bond yields rose so fast that the Bank of England had to step in and prevent pension funds from collapsing.

“If he wants to reassure markets, he will have to announce early action in the form of a significant fiscal tightening. This could deepen and/or prolong the recession and ultimately create an even larger fiscal hole,” said Ruth Gregory, chief UK official. Economist at Capital Economics.

“If he tries to reduce the economic pain, he risks destabilizing the markets and prompting another increase in gold yields, which would also worsen public finances.”

Capital Economics expects Hunt to unveil fiscal tightening measures of up to £54 billion, about 1.9% of GDP, but to fund that mainly through careful tax increases rather than spending cuts, with most policies starting “later rather than Sooner,” said Gregory.