Jeremy Hunt UK Chancellor has imposed the highest level of taxation since World War 11 during the start of recession. Despite that, the pound has surprised the markets. In only a few weeks it rallied from $1.10 to $1.23— well above the $1.03 nadir when Liz Truss was prime minister.
The hope of Rishi Sunak, her successor and Hunt is to win back support for the Conservative Party from a disenchanted populace. Hunt said in his November budget that the aim was to protect the poorest and pensioner communities from the impact of rising prices and energy bills. To placate the financial markets, Hunt’s autumn budget included £25 billion ($31 bn) in tax increases. In a bizarre decision, however, he promised £30 billion of spending cuts but delayed them until after the 2024 general election.
This plan to postpone austerity pain may backfire as living standards are falling during an inflationary recession. Indeed, since Sunak became PM, polls have only narrowed slightly and the Labour Party opposition are still well ahead with a 22 point lead on the Tories.
Stealth taxes
Conservative Party member critics complain that former middle and higher income supporters have been hammered. They are encumbered by “fiscal drag” i.e. stealth tax rises. Tax thresholds have been frozen until 2028 which means that as salaries and wages rise with productivity, promotions and inflation, managers and workers are drawn into higher tax brackets. Britain’s current tax scales are zero tax up to £12,500, then 20 per cent until £50,000. Moreover, directors and others earning £125,140 or more must now pay 45 per cent in tax, compared with £150,000 previously.
“The stealth tax grab will double the number of higher rate taxpayers to eight million within six years,” calculated tax specialists. “A mean total of 11 million earners will be paying a greater rate of income tax.”
“Those in their 30s and 40s have been dealt the worst hand. Trying to raise a family and build up a savings war chest they face punishing taxes for earning more and accumulating wealth.”
AJ Bell, a financial services firm calculated that those earning £50,000 will pay an extra £6,570 in tax over the next six years because of Hunt’s freeze on thresholds.
Critics also complain that company tax which will rise from 19 per cent to 25 per cent next April may discourage foreign investment. Hunt has also permitted local authorities (municipalities) to raise local tax by 5 per cent.
“Hunt responded that the government “can’t do everything” but argued that the package would make the recession shallower and shorter.”
The Office of Budget Responsibility (OBR), which the government and global markets follow, paints a bleak landscape.
The OBR estimates that inflation will peak at a 40-year high of 11 per cent in the current quarter and would have been 13.5 per cent if the government hadn’t imposed a ceiling on energy prices.
The OBR calculates that the surge in cost of living will cut living standards by 7 per cent in the next two years, reducing them to 2014 levels.
“The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022,” predicts the OBR. “The peak-to-trough fall in gross domestic product of 2 per cent” will lead to an unemployment rise of 505,000 so that the rate will increase from 3.5 per cent to 4.9 per cent by the third quarter of 2024, the OBR adds.
Rising debt and the “doom-loop”
Public sector net debt will rise from 84.3 per cent of GDP or £2,054 billion last year to a 63-year high of 97.6 per cent (£2,695 billion) in 2025-26, forecasts the OBR. Including corporate and household debt, the total rose to £6,681 billion in the first quarter of 2022 or 170 per cent of GDP, calculates the Bank for International Settlements (BIS).
“This government has forced our economy into a doom-loop where low growth leads to higher taxes, lower investment and squeezed wages with the running down of public services,” Rachel Reeves Labour’s shadow chancellor said.
“Jeremy Hunt, appears to have pulled off the tricky task of reassuring the financial markets of the government’s fiscal discipline while also managing not to deepen the recession,” said Paul Dale Chief UK Economist at Capital Economics. “He may be able to reverse some of the tax hikes and spending cuts before the next general election.”
Conservative supporters hope so, but admit that an election victory is highly unlikely.
© copyright Neil Behrmann
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