Jeremy Hunt, chancellor, confronted the fiscal “storm” battering Britain on Thursday, announcing £55bn of tax rises and spending cuts intended to restore the country’s reputation and shore up its frail balance sheet.
Two months after Kwasi Kwarteng, Hunt’s predecessor, sparked market panic with a “mini” Budget that included £45bn of unfunded tax cuts, the chancellor’s Autumn Statement turned Tory economic policy on its head.
While Kwarteng announced the largest tax-cutting plan for 50 years, Hunt presided over the biggest tax-raising effort for 30 years outside the period of the pandemic, leaving the country with the highest tax burden since the second world war.
The chancellor told a sombre House of Commons that a massive fiscal consolidation, including £30bn of spending cuts and £25bn of tax rises, was needed to restore Britain’s credibility and tame inflation.
The Office for Budget Responsibility said that by 2027-2028 Britain would have a tax burden of 37.1 per cent of gross domestic product — one percentage point higher than forecast in March and a postwar record.
With Britain’s economy sliding into recession, the OBR forecasts highlighted the challenge for household and public finances, both of which will be strained by predicted 2023 inflation of 7.4 per cent. The economy is projected to contract by 1.4 per cent and is not forecast to recover to pre-pandemic levels until the end of 2024.
The OBR said that rising prices would erode real wages and reduce living standards in the biggest fall in six decades, down 7 per cent over the two financial years to 2023-24. This would wipe out the previous eight years’ growth, despite over £100bn of additional government support.
The pound was 1 per cent lower on the day at $1.1788 against the dollar after Hunt set out the package, slightly below the level before the chancellor began his statement. UK government bonds remained under moderate pressure, trading slightly below on the day.
Much of the fiscal consolidation, including “stealth” rises in taxes and a big squeeze on public spending, is scheduled for the years after an expected 2024 general election. Rachel Reeves, Labour Treasury spokesperson, said it was intended as an election “trap” for her party.
But one of the biggest increases in taxation — freezing national insurance thresholds for businesses — will take effect from April 2023.
Hunt delighted Tory MPs by finding money to soften the blow of rising inflation for the health and social care system, providing an extra £5bn a year, and a further £3bn for schools for the next two financial years.
He also announced inflation-linked increases to pensioners and those on benefits, confirming he was keeping the “pensions triple lock”. He said: “To be British is to be compassionate.”
Hunt said public spending would rise by only 1 per cent in real terms in the next parliament and capital spending would be frozen in cash terms, raising £21bn and £14bn respectively — the majority of the fiscal squeeze. This would represent a significant cut to capital spending plans.
The chancellor insisted that the tax rises and spending cuts were required by an “international crisis” and played down the idea that any of the problems were homegrown. “It is a recession made in Russia, a recovery made in Britain,” he said.
But his statement was a recognition that Britain’s dismal recent economic performance — hobbled by the 2008 crash, the Covid-19 pandemic, the Ukraine war and Brexit — meant the country was living beyond its means.
Hunt told MPs that his Autumn Statement would ensure that Britain’s debt was falling as a share of GDP by the end of the five-year forecast provided by the OBR, which was sidelined by Kwarteng.
Britain’s economic recovery from the depths of the pandemic has fallen short of its rivals. Figures collated by the OECD found that the UK economy was still 0.4 per cent smaller in the third quarter of this year than in the final quarter of 2019; the eurozone was 2.1 per cent larger and the US 4.2 per cent bigger.
Andrew Bailey, Bank of England governor, said on Wednesday that Brexit had contributed to the UK’s economic weakness, although Hunt and Rishi Sunak, prime minister, have played down its significance.
Hunt told MPs the global outlook was difficult. “We aren’t immune to these global headwinds,” he said. “But with this plan for stability, growth and public services, we will face into the storm.”
The chancellor said his principal objective was to help the BoE defeat inflation, which hit a 41-year high of 11.1 per cent in October. “We need fiscal and monetary policy to work together,” he said.
The chancellor insisted that his tax-raising measures were fair: they included a cut in the threshold for the 45 per cent top rate of tax from £150,000 to £125,000; the burden of dividend taxes and capital gains tax will also rise. “We are asking more from those who have more,” he said.
Businesses will also face a big tax increase, notably through the freezing of the national insurance threshold for employer contributions, which will raise £5.8bn by 2028. A windfall tax on energy companies will raise £14bn next year.
Hunt confirmed that average energy bills would be capped at £3,000 a year from next April for everyone, while the most vulnerable would receive special help to hold down their bills.
Among the measures announced by Hunt was a confirmation that EU rules governing the insurance sector, Solvency II, would be rewritten to release “tens of billions of pounds” of capital to be spent on infrastructure. The Sizewell C nuclear power station would be built.