Britain's Chancellor of the Exchequer Jeremy Hunt walks out of Number 11 Downing Street in central London on his way to make a full budget statement in the House of Commons. AFP
Britain's Chancellor of the Exchequer Jeremy Hunt walks out of Number 11 Downing Street in central London on his way to make a full budget statement in the House of Commons. AFP.
New Chancellor Hunt announced sharp tax rises and potential future spending cuts in his Autumn Statement to reverse the damage from his predecessor’s disastrous September ‘mini-budget’. But Britain’s new finance minister was unable to alter the UK’s bleak outlook.
Source: Bank of Singapore, Bloomberg
Firstly, the measures to stabilise the UK’s debt-to-GDP are significant, worth GBP55 billion by the financial year 2027-28 (around 2.5% of GDP). But the bulk of the fiscal tightening will be backloaded to fall only after the next UK election in early 2025. For example, government spending will be unchanged for the next two years before rising by just 1% each year in real terms until 2027-28. This will save an estimated GBP30 billion in future spending by 2027-28.
Source: Bank of Singapore, Bloomberg.
Thus, the UK budget deficit will still peak over 7% of GDP in the current financial year 2022-23 before falling to 5.5% of GDP in 2023-24 according to the UK’s independent Office for Budget Responsibility (OBR). Only after the 2008 financial crisis and the 2020 pandemic was the UK fiscal deficit worse off as the first chart shows.
Secondly, the lack of near-term fiscal tightening until after the 2025 election will pressure the Bank of England to raise interest rates further to curb inflation. October’s inflation rate hit 11.1% as the second chart shows. We anticipate the BoE lifting its Bank Rate from 3.00% to 4.00% in early 2023 through 50bps hikes in December and February despite the central bank forecasting the UK will suffer a two-year recession from 3Q22 to 2Q24.
Thirdly, Hunt’s tax rises, including lowering the threshold for the UK’s highest rate of tax at 45% from GBP150,000 annual income to GBP125,000, are projected to raise GBP20billion of revenue by 2027/2028. But the OBR anticipates the UK’s tax burden will rise to 37.1% of GDP, its highest levels since the Second World War. The ruling Conservative party’s Members of Parliament (MPs) who favour low taxes may vote against the budget, causing renewed political instability.
We thus remain cautious on the UK’s outlook. We now expect GDP to contract by 1.3% in 2023 as the UK suffers a prolonged recession and we see the GBP’s recent bounce fading again. Our three month forecast is 1.14 against the USD.
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