Autumn announcement Jeremy Hunt It had two audiences: creditors and voters. He needed to convince the former that Govt United kingdom With their money, they had to convince the latter that the conservative administration was doing all it could to limit the damage the global economic storm was causing them and their families.
So far, the Finance Minister seems to be doing well with the first objective. However, the costs of interest payments on debt have risen significantly. The government has taken major steps to meet the second, too, but the damage to real disposable income for households will still be huge. Meanwhile, he has adopted another set of fiscal goals and pursued austerity measures designed to achieve them in the years following the upcoming elections. Promises of financial chastity in the future could not be taken seriously. It can be achieved or not, but no parliament can force its successor.
What is certain is the effect of Russian aggression on Ukraine. This is the main explanation for the huge reviews in Predictions Office of Budget Responsibility (OBR), for its English abbreviation) since March. resolution Liz Truss s Quasi Karting To carry out massive unfunded tax cuts and spending increases at a juncture like this, while shirking contributions from the OBR and the Bank of England, was madness. Hunt went out of his way to praise these institutions, stressing that sanity had returned. So far, fortunately, the creditors agree.
The so-called imbecile premium (idiot premium) in bond yields United kingdom disappeared; However, the increase in debt-servicing costs will be massive: according to the Office for Budget Responsibility, government interest spending will move from 1.2% of GDP in 2020-2021 to 4.8% in 2022-23.
An increase in interest rates responds to inflationary pressure. This is only one of the economic problems that were caused or exacerbated by the rise in global energy prices, which in turn were exacerbated by the rise in commodity prices after the crisis. Energy is not only inflationary, but also deflationary in relation to GDP, and even more so in relation to real income, as the cost of imports has increased compared to the cost of exports. The result is a significant drop in economic growth expectations and an even more dramatic contraction in household income.
The elements of this big picture are striking. The Balance Sheet Office expects inflation to reach a 40-year high, 11.1%, in the fourth quarter of 2022, revised upward from a March forecast of 8.7%. He also expects the economy to enter recession for a little over a year starting in the third quarter of 2022 (i.e. now). He noted that for the first quarter of 2027, “the cumulative growth of real GDP since the last quarter of 2019 is 3.4 percentage points lower than our forecast for March”; 2.4 percentage points of this is due to lower cumulative growth over the forecast period. Moreover, most of it is due to lower potential growth, so it is likely to be permanent.
Worst of all is what will happen to the real disposable income of households. “Based on fiscal year,” notes the Office of the Balance Sheet, that percentage will drop 4.3 percent in 2022-2023 and be the largest since records began in 1956-1957. This is followed by the second largest drop from 2023 to 2024 at 2.8%.
These significant cuts in living standards come despite huge spending on aid: fiscal measures taken since March are expected to increase real disposable household income per capita by 4.5% in 2022-2023 and by 2.5% in 2023-2024. Not only does the impact on public finances come from the recession, but also from spending to ease the burden on households. Additional spending announced since March of £103 billion between 2022-2023 and 2024-2025. Tax increases and spending cuts will only begin to offset in 2024-2025 (for taxes) and 2025-2026 (for spending). The government will provide a lot of money during the two years leading up to the elections. Not surprisingly, financial goals are again missed. In fact, the net debt of the public sector is expected to reach the highest level in the past 63 years, 97.6 percent of GDP, in 2026-2027, compared to a forecast of 78.9 percent last March. It is undoubtedly a great storm.
Is there good news? if it is OBR He thinks inflation may turn negative in 2024. If that happens, interest rates may fall. The invasion of Ukraine may end sooner than expected, although the chances of reversing the pressure on gas supplies appear slim. In short, it is about weathering a storm that will be very painful for a large part of the city. Could the government have done more to cushion the blow? Just by being prepared to raise taxes to a higher level.
It is almost inevitable to set aside long-term issues. There is certainly no sign of radical new thinking about growth. Even worse, the crisis is dealing a major blow to already weak business investment, while the government plans to cut capital spending as well. These cuts are sure to be reflected in a long-term weakness in potential output.
However, there are things that can be done at a low cost. The most important achievement of Hunt and Rishi Sunak is to reintroduce a degree of coherence and predictability in policy making. Certainly this must now be extended to our relationship with our most important economic partner, the European Union. The era of the Brexit fantasy must be behind us. At the very least, and especially in a time of radical uncertainty, doubts about future business relationships should be cast aside. So let’s come to an agreement on Northern Ireland, let’s drop the totemic feud, get as close and stable an economic relationship with the European Union as possible, and then move forward. It’s time for us to do that.
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