The UK is facing the biggest hit to living standards in history as Jeremy Hunt introduced £30bn of back-dated spending cuts and £25bn of back-dated tax rises in an autumn statement that exposed the difficult economic situation of the country.
Underscoring the economy’s fragility, the chancellor pushed back further austerity measures until after the next election amid evidence that higher energy bills and the worst inflation in four decades will lead to a prolonged recession, a jump from unemployment of 500,000 and a lost decade for living standards.
In a grim assessment of the economic crisis, the independent Office for Budget Responsibility (OBR) said the biggest two-year contraction since modern records began, a cumulative fall of 7%, would end in eight years previous levels of growth in living standards and return them to their 2014 level by 2024.
The OBR said the economy had just entered a recession that would last more than a year and lead to a 1.4% contraction in the economy by 2023.
Hunt cut the budgets of Whitehall departments, extended the scope of the windfall tax on energy companies, extended the freeze on tax credits, lowered the threshold for paying the 45% rate of tax on the rent at £125,100, gave the go-ahead to the local authorities. increase council tax, and collect more from capital gains tax and inheritance tax as part of a plan to convince financial markets of the government’s intention to reduce its budget deficit.
But Hunt increased spending on the NHS and schools and postponed most of his austerity measures until 2024-25 and beyond as he stressed the need to avoid a “fatal loop” of rising taxes and lower growth.
“We’re honest about the challenges and fair in our solutions. Yes, we’re making tough decisions to tackle inflation and keep mortgage hikes down. But our plan also leads to a more superficial fall, lower energy bills unemployment, higher long-term growth and a stronger NHS and education system,” the chancellor said.
The head of one of the UK’s leading think tanks questioned whether any of the planned austerity measures will happen. Paul Johnson, director of the Institute for Fiscal Studies, said: “Fiscal tightening is well behind schedule, with the bulk of spending cuts in particular planned for after April 2025.
“Given the deep uncertainty surrounding the prospects and potential economic and social costs of an unnecessarily large initial fiscal tightening, this is probably the right choice, ultimately. But delay all hard decisions until after the next general election casts doubt on the credibility of these plans. The tight spending plans after 2025, in particular, may stretch credulity.”
Labor said wages adjusted for inflation were lower in 2022 than when the Conservatives came to power in 2010, a record unmatched since the mid-19th century.
Rachel Reeves, the shadow chancellor, said: “What people will be asking at the next general election is this: are I and my family better off with the Tories? And the answer is no.
“The mess we’re in is not just the result of 12 weeks of Tory chaos, but 12 years of Tory economic failure: woeful growth; investment is low; compressed wages; collapsed public services.
Labor said taxes on families would rise by £120 billion since Rishi was chancellor, equivalent to more than £4,000 per family.
The Prime Minister faces her first major electoral test in May’s local elections, with many Tory MPs fearing they will face a dramatic backlash over the cost-of-living cuts, which are expected to include increases of municipal taxes to 95% of local authorities.
Torsten Bell, director of the Resolution Foundation thinktank, said Hunt’s speech represented a complete change of position from Kwasi Kwarteng’s ill-received mini-budget in September.
“Stepping back, the UK government has gone from announcing the biggest tax cuts in 50 years to the biggest tightening since 2010 in just a few weeks. Today it provided the most reality-based version, but this reality will be felt very harshly as unemployment and energy bills rise, while average incomes fall by £1,700 over this year and next.”
Hunt said a “made-in-Russia energy crisis” had made tough decisions inevitable. The chancellor slashed the generosity of the government’s energy support package from next April, announced stamp duty cuts for home buyers would end in 2025 and said home owners electric cars should start paying excise duty on vehicles.
In what would be the first fuel levy rise for more than a decade, the OBR also forecast a 23% rise in fuel duty, which would raise almost £6 billion but increase the cost of petrol and diesel at around 12 pence per litre.
Fuel duty has been frozen since 2011 and was cut by 5p per liter in last year’s Spring Statement, a measure which will expire at the end of March. It was not mentioned in Hunt’s autumn statement, but the forecast said 12p a. a liter would be added to pump prices if the government did not act to freeze the tax again. The Treasury said no decision had yet been made on fuel rates for next year.
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The OBR said its measure of living standards, real household disposable income, would fall by 4.3% in the current financial year, the biggest fall since modern records began in the mid-nineties fifty
“This will be followed by the second largest fall in 2023-24, at 2.8%. This would be only the third time since 1956-57 that real household disposable income per person has fallen for two consecutive fiscal years; the last time this happened was after the global financial crisis.And the cumulative drop of 7.1% from 2021-22 to 2023-24 is large enough to bring real disposable household income per person to its lowest level since 2013-14.”
There was a muted response to the Autumn Statement from Tory MPs, who sat in deathly silence as the chancellor announced a series of tax rises that will leave the UK with its biggest tax burden since the second war worldwide
One former minister said: “Many of us are very uncomfortable with the tax increase. It’s not what the public expects from us, but there’s not much we can do about it right now.”
Former cabinet minister Jacob Rees-Mogg questioned the government’s tax rises but denied he was “threatening anything”, telling Channel 4 News on Thursday night he was “simply standing up for Toryism”. He said raising taxes was “the easy option.”
“I think the Conservative party should ensure that taxes in the country and spending are matched at a reasonable level. Taxation has gone up too much and there are problems with the level of spending we have,” he said.
“I think we need to look at the efficiency of government to make sure the money is being spent well before we get the easy option of taxing.”
Conservative strategists hope Hunt has done enough to stabilize the economy and, if the international outlook improves, that Britain can begin to emerge from recession before the next election. They are betting that households are better off financially and therefore less likely to punish conservatives electorally.
However, by delaying £30bn of spending cuts until after the election, the chancellor has ensured that the state of public services will be a key battleground ahead of the next election.
Sunak is already struggling to hold his party’s 2019 election coalition together, with red-wall voters and those in the traditional Tory heartland wanting starkly different outcomes from the budget.