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CWA # 849, 20 November 2022

NIAS Europe Studies
UK’s new push to promote economic growth and stability: Three Takeaways

  Madhura Mahesh

The new UK government introduced the Autumn Budget amid high inflation rates and a volatile market. The new Chancellor aims to stabilise the UK economy and reverse the effects of the Growth Plan introduced by the Truss administration before the economy goes into recession.

UK’s new push to promote economic growth and stability: Three Takeaways

On 17 November, the UK Treasury Chancellor Jeremy Hunt unveiled the highly anticipated Autumn Budget. Following the controversial UK Growth Plan, which led to the fall of the Pound to its lowest in decades and subsequently the resignation of former Prime Minister Liz Truss, this Autumn Budget was closely watched by everyone worldwide.
According to Hunt, the Autumn Statement 2022 is a reversal of the policies outlined in the UK Growth Plan. It looks to promote stability, growth, and public services of the UK economy and society. The statement outlines policies to reduce the national debt, support the Bank of England in controlling inflation and restore trust in businesses to invest more in the UK. The Autumn Statement outlines the goal of the government to achieve its debt and spending targets in five years compared to the current target of three years.

After the announcement, the market reacted positively with no major shocks or uncertainties. While there was a fluctuation where the UK government bonds weakened, and the Pound fell by 1.1 per cent against the US Dollar (around USD 1.18), investors have praised the budget. A portfolio manager at Union Bancaire Privée Mohammed Kazmi said: “The big rally in the run-up and a relatively muted reaction today suggests this government has restored UK credibility in the eyes of the market.”

This analysis trace three takeaways from the latest statement
1. Difference between the UK Growth Plan and the Autumn Statement 2022
When the UK Growth Plan was introduced, it talked about increased spending and many unexplained tax cuts, which projected a rise in national debt and projected an uncertain future for the UK economy. Before the Statement was released, it was expected to address the fallouts of the Growth Plan and address the major concerns plaguing the UK economy. Jeremy Hunt said that if the government hopes to achieve all the targets and prioritize stability, growth, and public services, it needed to reverse the policies outlined in the Growth Plan. This was seen in the very nature of the budget, which was outlined with increasing taxes, freezing thresholds, focusing on vulnerable communities, and cutting public spending to a large extent. The Growth Plan projected an increase of USD 72 billion in borrowings, whereas the Autumn Statement proposes an additional GBP 55 billion in tax rises and spending cuts reducing the current national debt amid growing inflation rates. It looked at increasing public spending to “boost the growth of the UK economy.” On the other hand, Autumn Statement has cut public spending except for increasing the budget of the NHS by GBP 3.3 billion per year and the spending on schools by GBP 2.3 billion per year for the next two years.

2. The OBR forecasts a grim future for UK economy
The Office of Budget Responsibility (OBR) is a fiscal watchdog which analyses the UK public finances and UK. It prepares two five-year forecasts for the economy and public finances annually which are presented alongside the November Budget Statement and Spring Statement. The Office for Budget Responsibility (OBR) on the UK economy alongside the Autumn Statement predicted a grim future for the economy. The OBR proclaimed that the economy is in danger of recession due to the falling output in Q3 2022 by 2.1 per cent total and the increase in demand for energy and cost of living over the winter. The OBR projects the inflation rates to hit 11.1 per cent in the last quarter of 2022 compared to the 8.7 per cent projected in March 2022, which will be a 41-year high. For 2023, the OBR expects the inflation to spill over and reduce to 3.8 per cent in the last quarter of 2023 and the GDP to grow by -1.4 per cent. The OBR also predicts that in the next two years, household income will fall to its lowest seen in generations and by 2024, the unemployment rate to hit 4.9 per cent. The OBR projects that the potential recession will hit the economy in 2023-2024 after which the economy will emerge from the recession in 2025.

3. Increased burden on the public
The Autumn Statement introduces a series of policies that look at raising taxes, both individual and corporate. The budget is said to bring in GBP 55 billion in tax increases and cuts in public spending. The controversial 45 per cent additional rate of income tax paid on earnings over GBP 150,000, which was slashed in the Growth Plan, has now been revised. The income level has now reduced to GBP 125,140 from GBP 150,000, which brings in more people into the tax bracket. The Statement also proposes a freeze in income tax personal allowance, higher rate thresholds, main National Insurance, and inheritance tax thresholds for two more years till April 2028. The Autumn Statement provides the local councils in England to increase council tax up to five per cent a year from the current three per cent without a local vote. With the OBR projecting increased inflation rates and a price hike, the public, especially the middle class, will be bearing the brunt of this Autumn Budget. While the Autumn Statement proposes an increase in the minimum wage for people over 23 years to GBP 10.42 per hour from GBP 9.50 from April 2023 and also an increase in State pension and benefits to the disabled by 10.1 per cent in line with inflation for the next two years it is predicted that the public will experience a tough time with the increase in the overall cost of living. The government will be increasing the price cap on energy for a year after April 2023 but has reduced the amount from GBP 3,000 annually to GBP 2500. The Autumn Statement also includes a new 45 per cent tax on electricity generation companies and increased the windfall tax on oil profits from 25 per cent to 35 per cent till March 2028. This will lead the companies to introduce measures that will inevitably shift some of the burdens to the consumers and keep the energy prices high. The Statement also includes policies applicable from 2024 onwards, such as the new road tax to be paid by electric cars, vans, and motorcycles which will keep the pressure on household income.

To conclude, the Autumn Statement 2022 focused on stabilizing the economy before the recession hits the UK to mitigate the extent of damage to the UK economy. With the introduction of tax rises and spending cuts, the markets have reacted positively to the statement. It remains to be seen how the government responds to public discontentment on tax increases and tackles the projected recession of the economy.

References
Autumn Statement 2022 HTML,” gov.uk, 17 November 2022 
UK faces biggest fall in living standards on record,” BBC, 18 November 2022 
Autumn Statement 2022: Key points at-a-glance,” BBC, 18 November 2022 
Autumn Statement: Hunt has picked pockets of entire country, Labour says,” BBC, 18 November 2022 
UK markets take Autumn Statement in stride,” Financial Times, 17 November 2022 
About the Office for Budget Responsibility,” obr.uk 
Chancellor announces new Growth Plan with biggest package of tax cuts in generations”, gov.uk, 23 September 2022 
Pound sinks as investors question huge tax cuts”, BBC, 23 September 2022


Madhura Mahesh is a Research Intern in the Scool of Conflict and Security Studies at the National Institute of Advanced Studies.

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