Facing Recession, U.K. Outlines Billions in Tax Increases and Spending Cuts
LONDON — Seeking to restore Britain’s fiscal credibility after a calamitous foray into trickle-down economics, the British government on Thursday announced tens of billions of pounds of spending cuts and tax increases that officials promised would plug a gaping hole in the nation’s public finances.
The chancellor of the Exchequer, Jeremy Hunt, detailed a raft of tax increases and cuts to government programs worth a cumulative 55 billion pounds, or about $65 billion. It amounted to one of the most austere budgets ever imposed on Britain, a country that is already teetering on the edge of recession.
The plan’s immediate goal was to reduce a public deficit swollen by vast payouts during the coronavirus pandemic and the energy crisis. But the budget was also an act of fiscal penitence after the sweeping tax cuts rolled out in September by the last prime minister, Liz Truss. Those proposals roiled the markets, caused the pound to crash and cost Ms. Truss her job a few weeks later.
The remedy prescribed by Mr. Hunt and his boss, Prime Minister Rishi Sunak, is an almost complete reversal of that, and it will be economically and politically painful. It will raise taxes on tens of millions of Britons — wealthy and working class alike — and effectively cut funding for the Defense Ministry, foreign aid, cultural institutions in London, and some public-works projects.
“Anyone who says there are easy answers is not being honest with the British people,” Mr. Hunt said in closely watched address to Parliament. “We want low taxes and sound money, but Conservatives know sound money must come first.”
Rarely in British history has a budget loomed so large. In addition to a recession, which Mr. Hunt confirmed on Thursday, the country is suffering from double-digit inflation — 11.1 percent in October, the government said on Wednesday — as well as soaring fuel prices and rising interest rates. Some people have delayed turning on the heat in their houses; others don’t know how they will be able to pay the higher monthly costs of their mortgages.
As Mr. Hunt spoke, the House of Commons veered between tense silence as lawmakers digested the specific measures and raucous protests from the opposition benches when the chancellor claimed that Britain’s woes were largely a legacy of the pandemic and of the disruption caused by Russia’s invasion of Ukraine.
Mr. Hunt tried to cushion the blow to Britons by announcing an increase in the national living wage, which protects lower-paid workers, to £10.42 an hour, from £9.50, as well as £3.3 billion in additional funding for the revered National Health Service in 2023 and 2024. He also increased and extended a windfall profits tax on energy providers that have reaped huge gains on skyrocketing oil and gas prices in the wake of Russia’s invasion of Ukraine. And he imposed a windfall tax on electricity generators.
Many of the spending cuts will not take effect for two years, pushing them off until after the next general election, which Mr. Sunak must call by January 2025. That puts the opposition Labour Party into something of a quandary. With a double-digit lead in polls over the governing Conservatives, Labour could vault into power, only to find itself inheriting seriously depleted public services.
Many of Mr. Hunt’s measures had been telegraphed by the government, and the markets largely shrugged off his address. The British pound, which had risen in advance of the speech, fell slightly to £1.17 to the dollar.
“The chancellor should have come here today to ask for forgiveness,” the Labour Party’s shadow chancellor, Rachel Reeves, said in a response to Mr. Hunt. The Conservative government, she said, had left Britain with “inflation spiraling, growth plunging, living standards falling.”
The budget is a pivotal test for Mr. Sunak, a former chancellor who once worked for Goldman Sachs and who has brought a more technocratic, fiscally minded approach after the supply-side experimentation of Ms. Truss. He won a contest to replace Ms. Truss last month after failing to beat her in a leadership campaign in the summer during which he warned that her tax cuts would cause havoc
Mr. Sunak’s bet is that the measures will put public finances back on sound footing, claw back Britain’s reputation in global markets and position the economy for a rebound before an election. In the short term, however, Mr. Hunt acknowledged that the measures were likely to deepen the misery for Britain, which is still suffering the economic aftershocks of Brexit and the coronavirus pandemic.
Some likened the budget to the austerity measures imposed by Prime Minister David Cameron and his chancellor, George Osborne, after the financial crisis of 2009. That hollowed out many of Britain’s public services, including the N.H.S., which has struggled with the additional burdens of the pandemic.
Mr. Sunak was said to have been deeply involved in the number crunching with Mr. Hunt, who was recruited as chancellor by Ms. Truss after she ousted his predecessor, Kwasi Kwarteng. Mr. Sunak and Mr. Hunt reportedly wrestled with how to balance tax increases with spending cuts, initially pushing for a roughly 50/50 split, before shifting the emphasis slightly in favor of spending cuts, many of which will take effect later.
Economists generally agree that putting lower spending ahead of tax increases can have a more beneficial effect on rebalancing the books. A study of 17 such programs dating to 2006 by Oxford Economics, a forecasting and analysis firm, found that the ideal mix was about 60 percent spending cuts and 40 percent revenue-raising measures — roughly the split announced by Mr. Hunt.
But the same study also found that barely half the programs were successful in their goal of reducing debt as a percentage of gross domestic product. That is especially true in a hostile global economic environment like the one the government faces today. Britain must also deal with the legacy of Ms. Truss’s failed experiment, which still weighs on the country’s reputation for fiscal reliability.
“It will take longer to rebuild that reputation than it will to correct the gilt curve,” Andrew Bailey, the governor of the Bank of England, said on Wednesday to a Parliamentary committee. “We will have to tread carefully.”
Mr. Bailey was using a technical term for the returns on government bonds, which are normally higher for long-term than shorter-term bonds. That curve inverted during the market crisis set off by Ms. Truss’s tax cuts, reflecting a loss of investor confidence in Britain’s long-term government securities.