Jeremy Hunt will announce plans to cut government borrowing in Thursday’s autumn statement with the economy on the brink of recession and inflation at the highest rate in four decades.
Reshaping the Treasury’s tax and spending plans after Liz Truss’ disastrous mini-budget, the chancellor is expected to announce tax rises and real-terms spending cuts in an attempt to narrow a shortfall in revenue for the exchequer. Here are the five key charts that will underpin Hunt’s statement.
Inflation has soared to 11.1%, the highest level since 1982, as sky-high energy bills and the rising price of food and basic essentials pile intense pressure on families amid the cost of living crisis.
Russia’s war in Ukraine has pushed up wholesale energy prices, feeding through into a wide range of goods. Global energy prices have fallen back recently after work by EU nations to build up gas supplies for the winter and mild weather reducing demand. However, costs remain much higher than a year ago despite the government’s energy price guarantee, which limits a typical household’s bill at £2,500 a year on average.
The Bank of England expects inflation to remain above 10% for several months to come, before falling back later next year thanks to a slowdown in the economy, easing global supply chain pressures, and a cooling in wholesale energy prices.
The chancellor will nonetheless face pressure to replace the government’s energy price guarantee when it expires in April. The Resolution Foundation fears average bills could reach £4,000 without renewed intervention.
Britain’s economy edged towards the brink of a lengthy recession in the three months to September, according to official figures showing a sharp decline in factory output and households reining in their spending.
Hunt warned of a “tough road ahead” for growth after GDP fell 0.2% in the third quarter, when there was also a hit to activity as businesses closed for the extra bank holiday for the funeral of Queen Elizabeth II.
Another negative GDP figure for the final three months of 2022 would confirm a technical recession, after growth of 0.2% in the second quarter. The Bank of England expects a prolonged recession lasting until the end of next year.
Balancing the books
Hunt has warned that everyone will be paying “a bit more tax” after the autumn statement to balance the books, as the government back pedals on the unfunded tax and spending promises made in the September mini-budget.
Borrowing levels were already expected to rise long before Truss’ botched plans triggered a meltdown in financial markets, as high inflation pushes up the UK’s debt servicing costs and erodes households’ spending power; dragging down economic activity and therefore tax receipts.
The Resolution Foundation forecasts the budget deficit – the gap between spending and income – could stand at £90bn in 2026-27 without action from Hunt. This would be substantially higher than the £32bn forecast made by the Office for Budget Responsibility in March.
Hunt is expected to use tax rises and spending cuts to narrow the deficit. In an ambition to restore faith in Britain’s ability to run sustainable public finances among jittery global investors, he will set out new fiscal rules – self imposed limits for the deficit and national debt – alongside billions of pounds in budget savings to meet them.
Rising borrowing costs
The UK government’s borrowing costs on financial markets have risen sharply in recent months. Some of the rise is down to global trends for higher borrowing costs across advanced economies, amid sky-high inflation, weak economic growth, and rising central bank interest rates. However, Britain suffered a bigger rise than comparable rich nations after Truss’ mini-budget.
Global investors balked at the prospect of the UK driving up national borrowing to finance tax cuts directed at the rich, at a time when the Bank of England was already moving to sell gilts – UK government bonds – to wind down its quantitative easing policy deployed since the 2008 financial crisis.
This rise in yields – the interest rate paid on gilts – made it more expensive for banks to borrow money too, as they have to compete with the government in the debt markets. This fed through to eye-watering mortgage costs for households.
Since Hunt scrapped most of the mini-budget, yields on 10-year government bonds have fallen back. But while this has eased some of the pressure, borrowing costs remain higher than the start of the year.
The Bank of England is also expected to further raise interest rates in response to sky-high inflation, albeit by less than expected if the mini-budget had remained.
Hunt is expected to reduce public spending. However, a renewed austerity drive would come after more than a decade of cuts has left public services close to breaking point.
An analysis by the Institute for Fiscal Studies shows government departments have faced steep falls in their day-to-day budgets, with cuts of more than a quarter for areas including work and pensions, housing, communities and transport.
Inflation is also eroding the spending power of government departments, leaving them with real-terms cuts. Public sector pay will be a particular focus, with unions threatening strike action and worsening staff shortages.