LONDON (AFP) -- Britain will on Thursday hike taxes and slash public spending in a government budget signaling a return to austerity despite millions suffering a cost-of-living crisis in an economy facing recession.
Conservative Prime Minister Rishi Sunak, who took office just three weeks ago, has vowed to fix the economic havoc created by his short-lived predecessor Liz Truss.
But he is mindful of sky-rocketing energy bills, decades-high inflation and rising interest rates that are squeezing households.
Finance minister Jeremy Hunt will present his crucial budget in Parliament, alongside official economic and inflation forecasts – with recent data signaling a grim outlook.
Chancellor of the Exchequer Hunt is expected to unveil fiscal consolidation totaling between 50 billion and 60 billion pounds (between $58.7 billion and $70.5 billion), media reports suggest.
“We’re all going to be paying a bit more tax, I’m afraid,” Hunt told UK media over the weekend, likening himself to the penny-pinching miser Ebenezer Scrooge in Charles Dickens’ festive favorite “A Christmas Carol.”
“We will be asking everyone for sacrifices,” he said, stressing however that the pain would fall disproportionately on the better off.
Britain’s economy shrank in the third quarter as inflation soars, recent data showed, likely confirming it is already in a recession.
The Bank of England (BoE) has said the UK economy would also contract in the current final quarter, meaning the economy was in a recession, which it warned could last until mid-2024.
“The big fiscal tightening ... is coming just as the recession begins,” noted Capital Economics analyst Ashley Webb.
“The clear risk is that the fiscal consolidation deepens the recession,” he cautioned.
Truss’ unfunded tax-slashing budget sparked a collapse in the pound and an explosion in state borrowing costs during her 49-day tenure that began in September.
Investors fretted over a black hole of as much as 200 billion pounds ($236 billion), forcing emergency intervention from the Bank of England.
She then fired her finance minister Kwasi Kwarteng and replaced him with Hunt, who set about reversing the much-criticized budget and curtailed a costly freeze in domestic fuel bills.
Yet it was not enough to keep Truss in Downing Street.
Markets have since regained an even keel after Sunak took the helm and political turmoil subsided, but retail lenders’ mortgage rates remain elevated.
“What we are seeing now is that stability has returned to the United Kingdom,” Sunak told Sky News in Bali, Indonesia, where he is attending the G-20 summit.
“But that’s because the expectation is that the government will make those difficult but necessary decisions to ensure that we can get a grip on inflation, reduce it for people with the cost of living and also limit the increase in mortgage rates.
“I would really want people to be reassured that ... all the decisions we make will have fairness and compassion at their heart.”
Economic storm clouds darkened even further on Tuesday as official data showed unemployment in the UK edged up to 3.6%.
The unemployment rate increased in the three months to the end of September from 3.5% in the three months to the end of August, the British Office for National Statistics (ONS) said in a statement.
At 3.6%, it was around the lowest level since 1974. Inflation data is also due for release on Wednesday.
The BoE this month sprang its biggest interest rate hike since 1989 to fight sky-high inflation, which stands at a four-decade peak above 10% as energy and food prices soar as a result of the Ukraine war.
The bank’s key rate has rocketed from 0.1% to 3.0% in under one year, in turn ramping up home loan repayments and worsening the cost-of-living crisis.
Britain’s main opposition Labour Party has slammed Sunak, arguing that the second wave of austerity is not the answer.
“I don’t believe that austerity 2.0, after the austerity that we have gone through after the last 12 years, is the right approach,” said Labour’s finance spokesperson Rachel Reeves.
“Public services are already on their knees,” added Reeves, a former Bank of England economist, calling it a “badge of shame” that the nurses felt compelled to go on strike.
Tens of thousands of staff in various industries have already gone on strike across Britain this year to press for higher pay.
Reports suggest that Hunt will freeze income tax rate thresholds, which means more people are dragged into higher tax brackets over time.
He could also overhaul the government’s energy bills support scheme with more targeted measures.
And Hunt could ramp up windfall tax on oil and gas giants, whose profits have surged on the fallout from Russia’s war on Ukraine.