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UK unveils recession budget following market chaos

UK unveils recession budget following market chaos

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LONDON: Britain on Thursday unveiled a painful budget with £55 billion ($65 billion) of tax hikes and spending cuts despite confirming its economy was in recession.

Finance minister Jeremy Hunt said the measures were needed to bring financial stability after recent markets turmoil, insisting they would alleviate rather than aggravate the downturn, reports AFP.

A day after official data showed UK inflation rocketing to a 41-year high above 11 percent, Hunt triggered a fresh era of austerity following the calamitous and short-lived tenure of former prime minister Liz Truss.

Britain's Office for Budget Responsibility judged "that the UK, like other countries, is now in recession", Chancellor of the Exchequer Hunt told parliament on Thursday.

Despite the downturn, Hunt and Prime Minister Rishi Sunak insist tough action is needed after Truss unleashed a package of unfunded tax cuts that caused panic on financial markets.

The pound had hit a record-low close to parity against the dollar in late September after Truss failed to reveal the impact of her tax cuts on growth and inflation.

Her budget also triggered temporary purchases of UK government bonds by the Bank of England (BoE).

Sterling sank one percent against the US currency following Thursday's budget.

Pantheon Macroeconomics analyst Samuel Tombs warned the budget risked "amplifying the recession already underway".

Hunt said the UK economy was set to shrink 1.4 percent next year.

The BoE, which is raising interest rates to combat sky-high inflation, has warned the UK economy may experience a record-long recession until mid-2024.

Despite the grim outlook, Hunt on Thursday confirmed tax rises for workers alongside spending cutbacks.

He pledged, however, to increase spending on the cherished National Health Service amid a severe backlog in patient operations.

The chancellor added that benefits for the unemployed and pensioners would increase close to the inflation rate, and the minimum wage would climb.

Hunt also ramped up a windfall tax on oil and gas giants, whose profits have surged on fallout from the Ukraine war, to help fund support for the poorest consumers facing rocketing energy bills.

Energy giants such as BP and Shell will face an exceptional tax on profits of 35 percent, up from 25 percent, lasting an additional three years to 2028.

The government will also impose a new temporary levy on electricity generation companies.

The conflict in Ukraine has helped push worldwide inflation to its highest levels in decades. Prices are also up on supply constraints fuelled by the coronavirus pandemic.

Britain's economy is additionally being impacted by Brexit, BoE governor Andrew Bailey repeated Wednesday.

Hunt at the weekend likened himself to the penny-pinching miser Ebenezer Scrooge in Charles Dickens' festive favourite "A Christmas Carol", but argued his plan will "make sure Christmas is never cancelled".

He told MPs on Thursday: "In the face of unprecedented global headwinds, families, pensioners, businesses, teachers, nurses and many others are worried about the future.

"So today we deliver a plan to tackle the cost-of-living crisis and rebuild our economy."

It comes as UK workers across various sectors have gone on strike this year to demand pay rises to compensate for surging inflation.

State-employed nurses and firefighters could be the latest groups to carry out industrial action, joining further walkouts this winter by rail workers and postal staff.

Hunt has already set about reversing Truss's much-criticised budget by curtailing a freeze in domestic fuel bills, which have surged largely owing to the invasion of Ukraine by major energy producer Russia.

The government said on Thursday a cap on average annual household fuel bills will rise by a fifth to £3,000.

Rachel Reeves, economy spokeswoman for the main opposition Labour party, slammed the budget.

"The Conservatives have crashed our economy, given up on growth and sent inflation through the roof.

"As usual, it is ordinary working people who are paying the price," she added.