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Hunt’s Fiscal Medicine Won’t Dispel UK’s Economic Pain

Hunt's Fiscal Medicine Won't Dispel UK's Economic Pain
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Chancellor of the Exchequer Jeremy Hunt administered the smallest dose of fiscal medicine he could in Thursday’s Autumn Statement. But the unpalatable truth is that there’s a lot more to come as he tries to nurse the ailing UK economy through a recession.

To fill the £55 billion ($65 billion) gap in government finances, equivalent to 2% of gross domestic product, over the next five years, Hunt split the pain equally between spending restraint and tax hikes. He was prudent enough to raise an additional £9 billion of revenue as a buffer against any further deterioration in the nation’s finances. A sagging pound and moderately higher gilt yields ensued, but both were broadly in line with global markets. Thursday’s package isn’t likely to alter the Bank of England’s approach to interest rates.

The Chancellor emphasized his priorities are growth, public services and stability, with the latter getting most of the attention in this budget. Hunt’s phlegmatic, almost professorial delivery underscored his appeal as offering a safe pair of hands. While much of the repair work had already been done in repealing the tax cuts of the previous Prime Minister Liz Truss, the government was taking no risks, making this the most well-leaked budget in modern memory.

And yet for all the talk of stability, there was little to sugarcoat the medicine. Inflation is hitting its highest rate in 40 years and households are facing losses in disposable income of more than 7% and the largest fall in living standards since Office for National Statistics records began in 1956. Incomes aren’t expected to recover until 2027. Gone is the talk of making Britain a low-tax country, although most of the tax increases come from freezing thresholds so that more tax-payers are dragged into the net rather than hiking marginal rates.

The government won’t break a sweat financing this extra burden for now. Due to a lower government net cash need, according to Office for Budgetary Responsibility rules, there will be £24 billion less gilts sold out to March than had been planned. This means five fewer auctions and one less syndicated sale.

Next year is a different story as the OBR expects the overall borrowing need will be £305 billion. That implies gross gilt sales of at least £250 billion for 2023-2024. While that might not seem a huge increase on the £170 billion raised this year, in net terms it will be huge — the equivalent of the previous seven years of total net supply. Bear in mind the BOE will also be selling £40 billion in gilts each year, and probably the £19 billion of emergency purchases it was forced into six weeks ago when Truss’s tax-cutting spree send the bond market into a tailspin. It makes for the largest amount ever for gilt investors to stomach.

This budget certainly leaves some very big decisions on future tax and spending levels to be made after the next election, which has to be held by January 2025. It also leaves a big question about how to drive growth, since it certainly won’t come from tax cuts in this latest Conservative government. Instead, Hunt is banking on new initiatives such as creating the next Silicon Valley in the UK.

One thing seems certain: the UK is probably already in a recession which will worsen. The OBR, on whose forecasts the government’s fiscal plans rely, expects a contraction in GDP next year of 1.4%. That is a very difficult platform to get reelected on, which explains why Hunt actually loosened fiscal conditions by £4 billion over the next year and delayed the really big austerity measures to 2025 and beyond. That will pose a problem for the next government, whatever stripe it might be. The Treasury expects there to be 92,000 extra people paying tax by 2028, with 130,000 extra taxpayers paying the 45% top rate on their incomes. About the only solace for Tory lawmakers is that no personal tax went up rates.

This was as canny a political budget as it could be, delaying the harshest measures until after the next election. It is a marked improvement over Truss’s mini-budget, but that is a low bar. There was little here to sway markets, or voters, either way. Stability may be dull, but it beats the fireworks of recent months.

More From Bloomberg Opinion:

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

• Cost-of-Living Crisis Is a Slow Burn for UK Consumers: Andrea Felsted

• British Families Are Being Hit by Stealth Taxes: Stuart Trow

–With assistance from Therese Raphael.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.

More stories like this are available on bloomberg.com/opinion

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