- What’s the summary?
- What are the experts saying?
- Where does the opposition stand?
On June 22, 2010, George Osborne, a Conservative chancellor of the exchequer, issued what he called “this unavoidable budget,” which at its core included a good number of tax hikes and severe spending cuts.
More than 12 years later, on November 17 at 11.30am, the UK’s Finance Minister, Jeremy Hunt, prescribed yet another hard-stanced budget with an indication that better days were still some way off. According to Hunt, taxes would need to go up temporarily by £25 billion, and spending would need to be reigned in by £30 billion
Consequences for the larger Conservative agenda were unavoidable. It would be necessary to repeatedly postpone domestic reforms that previous Conservative Prime Ministers had pledged, such as those devoted to social care, in order to save money.
Plans to raise funds for international aid would be put on hold, and funds for public services would be restricted. The poorest people would receive assistance at home in the form of benefits and pensions that would be increased in pace with inflation, without which their plight would soon become unmanageable at a time when prices are rising at alarming rates.
Jeremy Hunt, the fourth Conservative chancellor of the Exchequer in as many months, managed to make the claim that the Conservatives were still the party that could be most trusted with the economy despite the UK’s economic and societal concerns at this time. He claimed there was no need “to choose between a strong economy and strong public services.”, because with “the Conservatives, and only the Conservatives, you get both”
The Markets did not react significantly to Hunt’s budget, as a large portion of it had been widely anticipated. The price of UK government bonds decreased but did not reach the day’s lows. The pound decreased in value relative to the dollar.
What’s the summary?
According to the independent Office for Budget Responsibility (OBR), the UK economy is currently in a recession and GDP will decline by 1.4% in 2023.
A four-year freeze on personal tax thresholds that started in April 2022 was established by the previous Chancellor, Rishi Sunak, in the spring 2021 budget. Over time, this forces more households with low incomes to pay basic rate tax, which begins at £12,570, and those with incomes starting from £50,250 to pay the higher 40% rate. Hunt has since gone a step further and extended the deep freeze by an additional two years, delaying any threshold adjustments until 2028. He also reduced the £150,000 level at which British citizens begin paying the 45p top rate of income tax to £125,140, a move that will push 250,000 people into the top rate. A person making £150,000 will now have to pay an extra £1,243 in income tax each year as a result of the reform.
In the current environment, where wages are rising in reaction to skyrocketing inflation, it is a profitable plan. The Treasury anticipated that this measure would collect £8 billion annually by 2026 when the four-year freeze was first announced in 2021. But the Institute for Fiscal Studies (IFS) now predicts that amount to be a staggering £30 billion annually by 2026, with inflation at a 41-year high.
The subject of inheritance tax can be sensitive. On estates valued more than £325,000 for an individual and £650,000 for a couple, it is paid at a rate of 40%. If a property is gifted to children or grandchildren, this rises by £175,000 for each person, up to a maximum tax-free figure of £1 million for a couple. So that more people would have to pay it, the administration decided to extend the rate freeze by an additional two years, to 2028.
When assets like shares and second residences are sold, capital gains tax is levied. Over the £12,300 annual tax-free allowance, higher-rate taxpayers pay 20% on share and security gains and 28% on residential property profits. Hunt has reduced the limit for the upcoming year to £6,000, which means that anyone paying the top rate will have to pay an extra £1,764 in taxes. In April 2024, this allowance will be reduced once more to £3,000, an increase of £2,604 over the current level.
Hunt claimed that the salary increase for the 2 million people earning the National Minimum Wage was their “biggest ever.” Adults aged 23 and older currently earn £9.50 an hour, but starting in April 2023, this rate will increase by almost 10% to £10.42, giving a full-time worker a pay raise of more than £1,600 annually. However, this won’t be sufficient to stop a decline in living standards given the UK’s annual inflation rate of 11.1%. The minimum wage should be increased to “at least £12 an hour,” according to the retail trade union USDAW. Paddy Lillis, its general secretary, claimed that although the group had “called for a meaningful package of support for working people,” the Chancellor had effectively decreased the minimum wage, calling it a “real-terms minimum wage cut”.
Additionally, there was some good news for pensioners who are battling with growing living expenses. A yearly raise is envisaged with the “triple lock” principle stipulating that the state pension will rise each year in accordance with the highest of the following three indicators: inflation as determined by the consumer price index, the average growth in wages across the UK, or 2.5%.
What are the experts saying?
Households are supported in the first half of the budget, which covers the years leading up to the next general election, by government expenditure and additional help from energy costs. John Glen, the Chief Secretary to the Treasury, suggested that there will be additional funding for schools, hospitals, and social services, and some of that funding could potentially be used to increase public sector employees’ wages.
After 2025, it’s a very different story. The choice to slash spending and raise taxes for everyone is one of the difficult but necessary decisions the chancellor warned the public about. If the chancellor is to achieve his goal of reducing debt as a percentage of economic production in five years, they are required.
In these situations, Mr. Hunt’s top concern is to prevent a worsening of the recession, which the Office for Budget Responsibility (OBR), the government’s independent forecaster, claims has already begun. Because of this, he is unable to implement a budget-balancing strategy right away.
The severe consolidation scheduled for after 2025, which will cost £55 billion or 2% of the country’s GDP, is a down payment to the markets. Mr. Hunt wants to demonstrate that he is committed to repairing the public finances. If his goal is to succeed, protecting growth is just as important. The government will have to pay a bill for its borrowing that will eclipse £100 billion annually over the next few years due to the recent dramatic spike in interest rates. But if investors are convinced that the proper plan is in place, the bill might be reduced.
Where does the opposition stand?
Unusually, the opposition’s position also matters greatly in this situation. And Labour’s second-ranking shadow Treasury official, Pat McFadden, acknowledged that the £54 billion in fiscal consolidation disclosed by the OBR data serves as the party’s current basis for its economic objectives, should it win the next election.
According to the Labour Party, if they win the next election, it will be up to them to clean up the mess left by the Conservative Party. Labour is publicly stating that they must demonstrate their commitment to financial stability. This could mean that the UK could be headed towards a situation similar to that of 1997, when Labour in opposition accepted the extremely austere expenditure plans set in place by the departing administration but may not have actually implemented them themselves.
All these significant economic figures could change before the election, and the OBR will undoubtedly release additional estimates before then. However, the political framework for the ensuing five years is already in place. The markets currently appear to be confident enough that this new team will handle the deficit. The prime minister and chancellor succeeded in informing lenders that they would require £24 billion less in funding than anticipated at the time of the mini-Budget. The widespread support for Labour contributes to its credibility. However, the most difficult issues have been postponed until after the election. The optimism that things would become considerably better in the next few months—possibly with the end of the war in Ukraine and the supply limitations caused by the pandemic—goes unspoken in this situation, as in lieu of this, there are still risks.