The Autumn Statement By Hunt Contains The Biggest Hit To Living Standards On Record
Austerity Is Being Deferred Until After The Next Election Despite Evidence Of Rising Energy Costs and A Lengthy Recession
Britain is facing the largest drop in living standards on record, as Jeremy Hunt announced £30 billion in delayed spending cutbacks and £25 billion in backdated tax rises in an autumn statement that revealed the country’s catastrophic economic situation.
Underscoring the economy’s fragility, the chancellor delayed more austerity measures until after the next election, despite evidence that increased energy costs and the highest inflation in four decades will produce a lengthy recession, 500,000 job losses, and a lost decade for living standards.
The independent Office for Budget Responsibility (OBR) said in a stark assessment of the economic crisis that the biggest two-year squeeze since modern records began – a cumulative drop of 7% – would wipe out the previous eight years of growth in living standards and return them to 2014 levels by 2024.
According to the OBR, the economy has recently entered a recession that will endure for more than a year and cause the GDP to contract by 1.4% in 2023.
As part of a plan to persuade the financial markets of the government’s intention to reduce its budget deficit, Hunt reduced the budgets of Whitehall departments, broadened the scope of the windfall tax on energy companies, extended the freeze on tax allowances, reduced the threshold for paying the 45% rate of income tax to £125,100, gave local authorities the go-ahead to raise council tax, and raised more from capital gains tax and inheritance tax.
However, Hunt raised expenditure on the NHS and schools while deferring most of his severe measures until 2024-25 and beyond, emphasising the importance of avoiding a “doom loop” of rising taxes and reduced GDP.
“We are honest about the challenges and fair in our solutions. Yes, we take difficult decisions to tackle inflation and keep mortgage rises down. But our plan also leads to a shallower downturn, lower energy bills, higher long-term growth and a stronger NHS and education system,” the chancellor said.
The chairman of one of the UK’s biggest think tanks has questioned if some of the proposed austerity measures would be implemented. “The fiscal tightening is heavily back-loaded,” said Paul Johnson, head of the Institute for Fiscal Studies, “with the vast majority of spending cuts in particular pencilled in for after April 2025.”
“Given the profound uncertainty around the outlook and the potential economic and social costs of an unnecessarily large up-front fiscal tightening, this is probably the right choice, on balance. But delaying all of the difficult decisions until after the next general election does cast doubt on the credibility of these plans. The tight spending plans post-2025, in particular, may stretch credulity.”
Wages adjusted for inflation were lower in 2022 than when the Conservatives came to power in 2010, according to Labour, a record unprecedented since the mid-nineteenth century.
Rachel Reeves, the shadow chancellor, said: “What people will be asking themselves at the next general election is this: am I and my family better off with the Tories? And the answer is no.
“The mess we are in is not just a result of 12 weeks of Conservative chaos, but 12 years of Conservative economic failure: growth dismal; investment down; wages squeezed; public services crumbling.”
Labour said that since Rishi became chancellor, household taxes will have risen by £120 billion, or more than £4,000 per family.
In May’s local elections, the prime minister will face his first serious electoral test, with many Tory MPs predicting a dramatic reaction over the cost of living squeeze, which is projected to involve council tax increases in 95% of local authorities.
According to Torsten Bell, head of the Resolution Foundation think tank, Hunt’s speech indicated a complete shift in the position since Kwasi Kwarteng’s poorly welcomed mini-budget in September.
“Stepping back, the UK government has gone from announcing the biggest tax cuts in 50 years to the biggest tightening since 2010 in just a few weeks. Today provided the more reality-based version – but that reality will feel very tough indeed, as unemployment and energy bills rise, while average incomes fall by £1,700 over this year and next.”
Hunt said that a “made-in-Russia energy crisis” had made harsh decisions unavoidable. The chancellor revealed that the government’s generous energy assistance programme will be curtailed beginning next April, that a discount in stamp duty for homeowners would stop in 2025, and that owners of electric cars would be required to pay vehicle excise duty.
The OBR also forecasted a 23% increase in fuel tax, which would collect about £6 billion but hike the cost of petrol and diesel by roughly 12p per litre, in what would be the first increase in fuel duty for more than a decade.
Fuel duty has been fixed since 2011, and it was reduced by 5p per litre in last year’s spring statement, a policy that is set to lapse at the end of March.
It was not addressed in Hunt’s autumn statement, but the projection indicated that if the government did not move to freeze the duty again, 12p per litre would be added to pump costs. The Treasury stated that no decision on fuel duty rates for next year had been taken.
According to the OBR, real household disposable income will decline by 4.3% in the current fiscal year, the largest reduction since modern records began in the mid-1950s.
“That is followed by the second largest fall in 2023-24 at 2.8%. This would be only the third time since 1956-57 that real household disposable income per person has fallen for two consecutive fiscal years – the last time this happened was in the aftermath of the global financial crisis. And the 7.1% cumulative fall from 2021-22 to 2023-24 is large enough to take real household disposable income per person to its lowest since 2013-14.”
Tory MPs hardly reacted to the autumn statement, sitting in dead silence as the chancellor revealed a slew of tax increases that will leave the UK with the highest tax burden since World War II.
One former minister said: “Many of us are very uncomfortable with whacking up taxes. It’s not what the public expects from us, but there’s not much we can do about it right now.”
Former cabinet member Jacob Rees-Mogg questioned the government’s tax increases but denied “threatening anything,” telling Channel 4 News on Thursday night that he was “simply making the case for Conservatism”. He stated that raising taxes was “the easy option.”
“I think the Conservative party should ensure that tax in the country and the expenditure match at a reasonable level. Taxation has got too high and there are issues with the level of expenditure that we have got,” he said.
“I think we need to look at the efficiency of government to make sure money is well spent before reaching for the easy option of putting up taxes.”
Conservative strategists believe Hunt has done enough to stabilise the economy and that, if the global situation improves, Britain will begin to emerge from recession before the next election. They are betting on households being in better financial shape and so are less inclined to punish the Conservatives electorally.
The chancellor, on the other hand, has ensured that the state of public services will be a prominent battleground in the run-up to the next election by deferring £30 billion in expenditure cutbacks until after the election.
Sunak is already battling to keep his party’s 2019 electoral alliance together, with red wall voters and traditional Tory strongholds demanding very different budget results.
Online sources: theguardian.com, yahoo.business.com
All opinions and views expressed or suggested by the Digital Zeitgeist are not necessarily the same opinions and views held by or suggested by GPM-Invest plus any and all partners, affiliates, parties, or third parties of GPM-Invest. Any type of media distributed by GPM-Invest IS NOT financial advice. Please seek advice from a professional financial advisor.