Jeremy Hunt has insisted there is “light at the end of the tunnel” if the Government sticks to its plan after figures showed Britain’s economy slipped into a recession at the end of 2023.
The Chancellor denied being complacent by downplaying data from the Office for National Statistics (ONS) which estimates GDP fell by 0.3% at the end of last year.
But he dropped fresh hints of a pre-election giveaway in the upcoming spring Budget, telling broadcasters that countries with “lighter taxes” tend to “grow faster”.
Treasury sources have said the Chancellor is considering a squeeze on public spending plans as a way to deliver tax cuts in the fiscal event on March 6.
The Office for National Statistics (ONS) estimated that GDP – a key measure of economic activity – fell by 0.3% in the last three months of 2023, following a decline of 0.1% in the previous three months.
It means that the economy entered a technical recession, as defined by two or more quarters in a row of falling GDP, for the first time since the first half of 2020 amid the havoc of the initial Covid-19 lockdown.
The Chancellor acknowledged the figures were “challenging” but said the Bank of England governor Andrew Bailey does not put “too much weight on this data” because the “underlying picture” is more resilient.
Asked whether it was complacent to play down the data when the economy has seen little movement in nearly two years, Mr Hunt told the BBC on Thursday: “Far from that, we recognise life has been very, very tough for families up and down the country.”
Mr Hunt added: “When the Prime Minister made his commitment he was very clear that tackling inflation had to come first… If we stick to our guns now, we can actually see light at the end of the tunnel.”
He denied having failed to anticipate or tell the country that the UK faced a contraction, saying: “That’s not true. When I did the autumn statement just after I became Chancellor, the forecasts were that the economy will contract by 1.5% in the next year.
“We stood behind those forecasts, and this is a Prime Minister who sticks to his plan when the data is encouraging, or even when it’s challenging like today.”
The PA news agency understands that Mr Hunt is considering slashing billions of pounds from public spending plans if he does not have the fiscal headroom for some tax cuts in the spring Budget.
Asked about the report on Thursday, the Chancellor said he would not break with convention to speak about the Budget in advance, but suggested that countries with “lighter taxes” did “tend to grow faster”.
He told Sky News: “But I would only cut taxes in a way that was responsible, and I certainly wouldn’t do anything that fuelled inflation just when we are starting to have some success in bringing down inflation.”
The latest ONS figures deal a hammer blow to Prime Minister Rishi Sunak in an election year after he promised to grow the economy as one of the five priorities of his leadership.
Mr Hunt said inflation and high interest rates were behind the output fall, but insisted the economy was “turning a corner”.
He said: “While interest rates are high – so the Bank of England can bring inflation down – low growth is not a surprise.
“But there are signs the British economy is turning a corner; forecasters agree that growth will strengthen over the next few years, wages are rising faster than prices, mortgage rates are down and unemployment remains low.”
Shadow chancellor Rachel Reeves said the Prime Minister’s promise to grow the economy was “in tatters”.
She said: “The Prime Minister can no longer credibly claim that his plan is working or that he has turned the corner on more than 14 years of economic decline under the Conservatives that has left Britain worse off.
“This is Rishi Sunak’s recession and the news will be deeply worrying for families and business across Britain.”
The fourth quarter contraction was the biggest since the first three months of 2021, at the height of the pandemic.
Most economists were forecasting a 0.1% decline in GDP between October and December.
The ONS said output fell 0.1% in December after downwardly-revised growth of 0.2% in November, while the contraction in October was also worse than first thought, at 0.5% against the 0.3% fall initially estimated.
Across the year as a whole, the economy grew by an anaemic 0.1%, down from 4.6% in 2022 and – when stripping out the pandemic-hit plunge seen in 2020 – the weakest growth since the aftermath of the financial crisis in 2009.
The ONS said the contraction was broad-based across all main sectors of the economy in the fourth quarter.
Retail and wholesale trade were the biggest drag on output in December, with health and education sectors also both contracting, according to the ONS.
Barret Kupelian, chief economist at PwC UK, said while the UK is in a technical recession, it would likely not be long-lasting.
He said: “We expect this episode to be one of the shallowest recessions of modern times, as it does not reflect a sharp and protracted downturn in response to a specific set of adverse economic circumstances.
“Business activity picked up significantly in the beginning of the year, which should translate to better real economic data.”
But a technical recession is seen reinforcing the case for an interest rate cut, with the Bank of England already indicating it is more a case of when, not if, a reduction will come.
