Britain’s Chancellor of the Exchequer announces tax increases and spending cuts, says the country is in recession

Chancellor of the Exchequer Jeremy Hunt unveiled a sweeping £55bn ($66bn) fiscal plan in his highly anticipated inaugural autumn statement.

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LONDON — The UK government on Thursday unveiled a sweeping £55 billion ($66 billion) fiscal plan to plug a gaping hole in public finances and restore Britain’s economic credibility even as the country teeters on a recession.

Chancellor of the Exchequer Jeremy Hunt outlined around £30bn in cuts and £25bn in tax increases in his highly anticipated inaugural autumn statement.

The measures include a six-year freeze on income tax thresholds and a reduction in the top income tax rate to £125,000 – moves that run counter to the big cuts touted in September’s catastrophic mini-budget.

“Unfunded tax cuts are just as risky as unfunded spending,” Hunt told the House of Commons.

Hunt said the measures would reassure markets that the government and the Bank of England are now operating in “lockstep”.

“We need fiscal and monetary policy to work together,” he said. “That means that the government and the bank are working closely together. Most importantly, it means that we have to give the world confidence in our ability to pay our debts.”

Sterling fell against the dollar after the announcement. It was trading at around $1.1811 at 1:30 PM local time.

A recession fiscal plan

The measures will exacerbate the financial woes of millions of Britons as they face the country’s worst cost-of-living crisis in decades and its longest recession on record.

However, Hunt said they were needed to limit 41 years of high inflation and restore the UK’s reputation; calling the plan the “ultimate growth strategy”.

We must continue a relentless fight to bring (inflation) down, including an unwavering commitment to rebuild our public finances,” Hunt said.

Among the other measures announced were a 10% increase in state pensions, benefits and tax credits – in line with September’s inflation rate – and an increase in the national living wage to £10.42 per hour for those aged 23 and over.

The dividend payment and the annual capital gains tax exemption will be reduced for the next two years, the finance minister said.

He also confirmed that the energy sector will face an extended windfall tax of 35% instead of 25%.

Thursday’s statement was accompanied by a long-awaited series of projections from Britain’s independent Office for Budget Responsibility (OBR), which painted a bleak economic picture for Britain.

Forecasts show that the UK is now in a recession, expected to last “just over a year” with employment rising from 3.5% to 4.9%.

Hunt said the government’s new plan will see the downturn more shallow and unemployment lower than previously forecast.

A big test for the government

The UK’s strategy sets the tone for Prime Minister Rishi Sunak’s premiership as he leads a new era of fiscal austerity and waning Conservative Party support.

It also marks a defining moment for Hunt, who was installed last month to restore UK credibility after predecessor Kwasi Kwarteng’s now-infamous mini-budget of unfunded tax cuts unleashed market chaos and emergency intervention.

Although Hunt’s then boss Liz Truss resigned at short notice – becoming the UK’s shortest-serving prime minister – he was retained by successor Rishi Sunak in a bid to ensure stability after months of political turmoil.

Shadow Chancellor of the Exchequer Rachel Reeves said on Thursday the new plans will make the UK even worse off than earlier this year.

“Here we are at the end of 2022, three prime ministers, four chancellors and four budgets later,” Reeves said. “And where are we? In a worse place than we started the year.”

The UK is the only Group of Seven (G7) country that has not yet returned to its pre-pandemic size, after a decade of almost stagnant income growth.

The Bank of England warned earlier this month that the UK is now facing its longest recession since measurements began a century ago.

Official data released on Friday showed that the economy contracted by 0.2% in the third quarter of 2022. A second consecutive quarter of negative growth going forward would indicate that the UK is in a technical recession.

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