The financial markets are increasingly determining the economic course of the United Kingdom. Prime Minister Rishi Sunak stressed on Monday the importance of “meeting the expectations of international markets”. Because confidence in British economic policy has been shaken.
The prime minister and his finance minister, Jeremy Hunt, are wringing their hands trying to pick up the shards left by Sunak’s short-term predecessor, Liz Truss, during her chaotic term in office. The costs are likely to be immense – Hunt will reveal exactly how high this Thursday.
Then the Chancellor of the Exchequer presents his financial plan. Cornerstones are already becoming known. Instead of radical – and not counter-financed – tax cuts as in the case of Truss, the government is now taking the opposite path, contrary to its conservative ideology. The tax burden is already higher than it has been for 70 years.
Especially the wealthier should pay more, as Hunt indicated. For example, the threshold for the top tax rate could drop from £150,000 to £125,000 in annual income. That would affect about 246,000 people, according to an analysis by auditor Moore Kingston Smith for the Times newspaper. But even low-income earners are not exempt. “I’m afraid we’ll all have to pay more taxes,” Hunt said recently, urging the population to “sacrifice.”
Avoid a lasting recession by all means
Prime Minister Sunak has now announced that the primary goal is to get public finances in shape. This is urgently needed: the budget deficit is estimated at around 40 billion pounds (45.7 billion euros). It is therefore expected that Hunt will not only raise taxes, but also cut public spending on health, for example – although experts warn that the NHS health service is already on the verge of collapse. But Sunak and Hunt want to avoid a prolonged recession, as predicted by the Bank of England. Inflation has recently risen to more than 10 percent – this is costing the state money as spending on social services and pensions is increasing.
Hunt had been appointed by Truss to succeed the hapless Kwasi Kwarteng and immediately set about retracting his announcements. That didn’t prevent the prime minister from leaving quickly, but the situation has stabilized since then. The pound pared losses as long-term government bond yields fell again. But the markets remain nervous. Because of Truss and Kwarteng’s adventurous financial course, the many property owners have to pay significantly higher mortgage interest rates. The National Institute of Economic and Social Research (NIESR) think tank estimates that by April 2024, one in five households will have little or no savings.
The new prime minister is emphatically optimistic
Sunak was now deliberately optimistic. “The Chancellor of the Exchequer has said that part of our job is not only to bring stability back to the system, which we will do, but also to lay the foundations for recovery and economic growth,” the prime minister said. Then the government could cut taxes again and support public services. But doubts remain that this will soon be possible.
As the newspaper “Financial Times” reported on Monday, the bad economic situation threatens to take on tens of billions of pounds more debt than previously thought. The regulator Office for Budget Responsibility (OBR) estimates that loans of almost £100 billion (EUR 114 billion) will be needed in the 2026/27 financial year (March 31). In March, OBR had estimated new debt for the period at £31.6 billion. Half of the higher loans are attributable to significantly increased costs for debt servicing. The rest is due to a weaker economic outlook, which is hurting tax revenues. Great Britain is threatened with an economic vicious circle.
