Chancellor Jeremy Hunt announced on Wednesday a plan that he hopes will speed up Britain’s stagnating economy, including childcare and pension reforms to get more people into work and corporate tax breaks to boost weak business investment.
Saying the world’s sixth-biggest economy was now set to avoid a recession this year – even if it will still contract – Hunt said he would extend help for households hit by soaring energy bills and freeze a tax on fuel.
“In the face of enormous challenges, I report today on a British economy which is proving the doubters wrong,” Hunt said, to jeers from the opposition Labour Party which is riding high in opinion polls ahead of an election expected next year.
“In the autumn we took difficult decisions to deliver stability and sound money,” said Hunt, who was rushed into the Treasury last October to undo the plans for tax cuts that sowed chaos in financial markets during Liz Truss’s brief premiership.
“Since mid-October, 10-year gilt rates have fallen, debt servicing costs are down, mortgage rates are lower and inflation has peaked. The International Monetary Fund says our approach means the UK economy is on the right track.”
Labour leader Keir Starmer accused Hunt of “dressing up stagnation as stability” and said Britain “is on a path of managed decline.”
After the shocks of Brexit, a heavy COVID-19 hit and double-digit inflation, Britain’s is the only Group of Seven economy yet to recover its pre-pandemic size, having already suffered a decade of near-stagnant income growth.
Hunt and Prime Minister Rishi Sunak resisted calls from some lawmakers in their ruling Conservative Party – alarmed by the biggest tax burden on the economy since World War Two – for big tax cuts now.
But he found money to extend energy bill subsidies for households by three months and a decade-long fuel duty freeze for another year.
Despite that help, and lower inflation than previously expected, living standards in Britain remain on track for a record fall over the two years to the end of March 2024, the Office for Budget Responsibility (OBR) independent forecasters said.
“Over this two-year period, households can expect to be substantially less well off on average than they were at the beginning of it,” Paul Johnson, director of the non-partisan Institute for Fiscal Studies, told the BBC, pointing to big tax increases announced by Hunt in November.
“So households aren’t going to be feeling great at the end of this.”
In a bid to speed up economic growth, Hunt expanded free childcare to children under two in England as a way to get more young parents into work. Campaigners said the 4 billion pound ($4.8 billion) annual price tag was too small to fix high childcare costs.
Another measure to boost the size of the workforce abolished penalties for people breaking thresholds on pension contributions in an attempt to keep more older people in work.
The OBR said it was hard to forecast the impact of Hunt’s attempts to get more workers into the jobs market and it warned that the participation rate – people in work or looking for it – was set to hit a 23-year low next year before rising again.
Hunt also announced a new incentive for business investment that will allow companies to offset 100% of their capital expenditure against profits, although that represented a scaling-back of tax breaks under a previous scheme.
The OBR said the change would not cushion all the pain for companies whose corporate tax rate will leap next month to represent its heaviest burden on businesses since the tax was introduced in 1965.
Other measures included more investment in nuclear power.
Hunt said the government would add 11 billion pounds to the defence budget – which has been stretched by Britain’s support for Ukraine in its war with Russia – over the next five years.
RECESSION AVOIDED, JUST
Under a new set of economic forecasts, gross domestic product was set to shrink by 0.2% in 2023 rather than contract by 1.4% as projected by the OBR in November.
Since then, energy costs – which soared after Russia’s invasion of Ukraine – have come down and there have been signs of a recovery in some economic data.
“Today the Office for Budget Responsibility forecast that because of changing international factors and the measures I take, the UK will not now enter a technical recession this year,” Hunt said.
The OBR forecast economic output would grow by 1.8% in 2024 and by 2.5% in 2025, Hunt said, compared with its previous forecasts for growth of 1.3% and 2.6% respectively.
It cut its forecast for inflation this year to 6.1% from 7.4% in November – and said it would remain under 1% for the following three years.
Many economists have said Hunt probably wants to hold back some fiscal firepower for closer to the next national election.
But Wednesday’s forecasts showed the limits going forward.
Hunt’s target to get Britain’s public debt – currently standing at about 2.5 trillion pounds – falling as a share of GDP in five years’ time was on course to be met with a buffer of just 6.5 billion pounds.
The OBR said that was the narrowest margin for any finance minister since George Osborne set up the fiscal watchdog in 2010.