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Analysis | Hunt’s fiscal fixes won’t fix the UK economy

Remark

Chancellor Jeremy Hunt’s first budget had to pass one test above all: after September’s fiscal policy debacle, which crushed the pound and sent bond yields soaring, investors had to be convinced that the new Tory leaders know what they’re doing . Hunt took no chances and did what was necessary. He announced hefty tax increases and spending cuts that should eventually be enough to bring government borrowing back under control.

The bad news is that the prospects associated with the new measures are downright bleak. The Office for Budget Responsibility, the UK’s independent tax watchdog, is forecasting a recession of more than a year. Total output is not expected to recover to pre-pandemic levels until 2024, a far worse performance than that of other advanced economies. Household disposable income, adjusted for inflation, will remain below pre-pandemic levels until 2027. Give Hunt full credit for facing reality – but the severity of this setback cannot be disguised.

The immediate challenge is Russia’s war against Ukraine and the ensuing turmoil in global energy markets. (The UK economy is heavily dependent on gas.) But this latest shock came on top of others, each serious in its own right. The UK economy was hit particularly hard by the financial collapse of 2008 and recovered only hesitantly. Next came Brexit, which curbed the country’s trading ability, stifled investment and exacerbated economic uncertainty. When energy costs, inflation and government borrowing all spiraled out of control, the government led by Liz Truss attacked investors with a proudly delusional tax cut. All in all, quite a throwback.

Hunt’s tax reforms are broadly well thought out. His budget maintains short-term emergency spending to protect households from higher energy prices and other cost-of-living pressures, but limits spending and significantly increases taxes in coming years to curb borrowing. Some tax increases are explicit (the top rate of 45% on incomes will be around £125,000 [$148,000], not £150,000), but most are low profile (personal income tax thresholds will be frozen in nominal terms until 2028). By 2027, the fiscal measures will save around £60 billion from the projected annual deficit. Government debt is expected to rise to just under 100% of gross domestic product in 2025 and 2026, before declining slowly from 2027 onwards.

To meet these new estimates, the government has had to relax its fiscal targets. It now pledges to get loans below 3% of gross domestic product and debt will fall within five years. (The existing rules, soon to be replaced, require current spending to be covered by taxes and debt to begin to fall within three years.) That’s a sensible adjustment: There’s no point in setting goals that no one expects, or even wishes under the current circumstances, to meet. Most importantly, Hunt has, at least for now, fiscal targets and the policies needed to meet them.

After the Truss disaster, few would still argue that fiscal credibility doesn’t matter — and with any luck, Hunt’s announcements will help restore it. But it must be emphasized that this hardly begins to solve what is wrong with the British economy. A recession has started and will have to be weathered to bring inflation under control. Beyond that, chronically slow productivity growth, combined with increasing detachment from the workforce, means slow improvement in living standards at best.

Britain’s economic policy should focus on promoting skills, investment and trade (particularly with the European Union) if there is any hope of restoring economic vitality. Avoiding the next fiscal meltdown is a start, but only a start.

More from Bloomberg’s opinion:

• Hunt’s fiscal medicine won’t ease UK economic pain: Marcus Ashworth

• 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

The editors are members of the Editorial Board of Bloomberg Opinion.

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

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