Tradition dictates that the United Kingdom chancellor is allowed an alcoholic drink while delivering the government’s annual tax and spending budget, the only time liquor is permitted in Parliament. That Chancellor of the Exchequer Jeremy Hunt declined to raise a glass this past week was apt, given the sobering nature of the economic measures he was forced to unveil ahead of a coming election.
It isn’t just the U.S. electorate that will be going to the polls. Britons will also be getting the chance to pick their leaders. The U.K. budget happened to come in the same week as President Joe Biden effectively kicked off his re-election campaign with the State of the Union address. Both administrations have a challenge ahead of juggling politics and the economy.
The fact that the U.K.’s budget announcement wasn’t bolder is indicative of the position the economy finds itself in. The U.K. entered a technical recession at the end of last year, inflation remains stubbornly high at 4%, and interest-rate cuts remain “some way off,” according to Bank of England chief economist Huw Pill.
The government faced a dilemma ahead of the budget, balancing fiscal prudence with the desire to give voters an economic sweetener.
Hunt tried to thread the needle with a cut to national insurance—a tax on workers’ wages—paid for by a new tax on vaping and an extension of the windfall tax on profits of oil-and-gas companies, among others. A more expensive, if more voter-friendly, income-tax cut was shelved. The tax cuts may not even satisfy voters—the ruling Conservatives still trail in the polls, despite a previous national insurance cut in November.
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“Opportunistic tax cuts will not shift the U.K. economy onto a superior growth path,” says TS Lombard economist Konstantinos Venetis. “These will ultimately take a toll on future public investment and therefore do little to lift long-term growth.”
In September 2022, Hunt’s predecessor, Kwasi Kwarteng, unveiled 45 billion pounds sterling ($57.3 billion) of unfunded tax cuts. It was a disaster and spooked global markets; the pound hit a record low of $1.03 against the dollar, U.K. government bond yields soared, and the BOE had to intervene. Hunt must tread carefully.
In the government’s ideal world, lower inflation and earlier and more aggressive rate cuts would reduce future borrowing costs and provide Hunt and Prime Minister Rishi Sunak with more fiscal headroom for a giveaway to boost household finances.
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But the past few months have not been kind, and the U.K. has a strict rule requiring government debt as a percentage of gross domestic product to fall in the final year of a five-year forecast.
However, the Office for Budget Responsibility, or OBR, the country’s fiscal regulator, offered better news: It sees inflation falling to the BOE’s 2% target in 2024’s second quarter, a bold forecast. The Federal Reserve would be thrilled with such an outcome, as would other central banks around the world.
The OBR is also more optimistic about the U.K. economy than it was in November, expecting GDP to rise 0.8% this year and 1.9% in 2025, up from 0.7% and 1.4%, respectively, in its previous forecast.
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Hunt said the U.K. will “soon turn the corner of growth.” While forecasts suggest that he may be right, it’s doing so from a low base. GDP at the end of 2023 was just 1% higher than at the end of prepandemic 2019. That’s worse than every Group of Seven country except Germany, which has increased only 0.1% over that period.
The U.S. has grown 8.2% in that time, says the Organization for Economic Cooperation and Development, giving Biden a far stronger economic record than his counterpart Sunak in the U.K.
Write to Callum Keown at [email protected]
