Hunt’s Fiscal Repairs Won’t Mend the UK Economy


The first budget of UK Chancellor Jeremy Hunt had to pass one test above all: After the fiscal-policy debacle of September, which crushed the pound and caused bond yields to run, investors should predict that the new leaders of the Tories they know what they are doing. Hunt took no chances and did what was necessary. He has announced massive tax increases and spending cuts that should, in time, be enough to get public borrowing under control.

The bad news is that the forecasts attached to the new measures are very bad. The Office for Budget Responsibility, Britain’s independent financial watchdog, predicts a recession lasting more than a year. The combined effect is not expected to return to pre-pandemic levels until 2024, a far worse performance than other major economies. Disposable household income, adjusted for inflation, will remain below epidemic levels through 2027. Give Hunt credit for facing the truth – but there’s no hiding the gravity of this failure.

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The immediate challenge is Russia’s war in Ukraine and the resulting chaos in global energy markets. (Britain’s economy is heavily dependent on gas.) But this latest shock comes on top of others, each severe in its own right. The UK economy was hit hard by the financial crisis of 2008 and has since recovered slowly. Next came Brexit, which weakened the country’s trading power, depressed investment, and increased economic uncertainty. So, with energy costs, inflation and public borrowing all on the rise, the government led briefly by Liz Truss hit investors with a budget tax cut. It is a total legacy.

Hunt’s fiscal reform was, in broad terms, well-judged. His budget preserves emergency spending in the short term to protect households from higher energy prices and other cost-of-living pressures, but curbs spending and raises taxes sharply in future years to trigger borrowing. Some of the tax increases are obvious (the 45% top rate on earnings will kick in around £125,000 [$148,000], not £150,000), but more stealth (personal-tax thresholds will be frozen in nominal terms through 2028). By 2027, the budget measures will cut £60 billion from the annual deficit. Public debt is expected to peak at just under 100% of gross domestic product in 2025 and 2026, then fall slightly starting in 2027.

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In order to meet this new budget, the government has been forced to stop its budget. It now promises to borrow less than 3% of gross domestic product and debt on a downward trend over five years. (Existing rules, soon to be changed, require current spending to be covered by taxes and debt to begin falling within three years.) It’s a reasonable adjustment: There is no goal in goals that no one expects, or desires under current conditions; to be met. What’s important is that, for now at least, Hunt has the financial and policy targets to hit.

In the aftermath of the Truss disaster, few would argue that financial integrity is irrelevant – and luckily, Hunt’s announcements will help restore it. But it stresses that this does not begin to fix what is wrong with the UK economy. A recession has begun and will have to be tolerated in order to control inflation. Further, the chronically slow growth in productivity, combined with growing unemployment, means only a slow improvement in living standards.

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British economic policy must shift to promoting skills, investment and trade (above all with the European Union) if there is any hope of restoring economic strength. Avoiding the next financial meltdown is a start, but only a start.

More from the Bloomberg opinion:

• Hunt’s Fiscal Medicine Won’t Alleviate UK’s Economic Pains: Marcus Ashworth

• Will Sunak Test the Love of Britain’s Top 1%?: Therese Raphael

• Slow Burn Living Problems for UK Consumers: Andrea Felsted

The editors are members of Bloomberg Opinion’s editorial board.

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