The UK faces a collapse in living standards, higher bills, tax hikes and increased unemployment as the economy slumps into recession.
Chancellor Jeremy Hunt told MPs he was having to make difficult decisions to ensure a “shallower downturn”, but the economy was still expected to shrink 1.4% in 2023.
A majority of households will be worse off as a result of Mr Hunt’s decisions, which will see the cap on energy bills increase and the tax burden rise to its highest sustained level since the Second World War.
The Chancellor blamed Russian president Vladimir Putin’s invasion of Ukraine for a “recession made in Russia”, with the spike in energy prices driving up inflation, but he was also being forced to manage the financial turmoil caused by his predecessor Kwasi Kwarteng’s mini-budget in September.
He faced criticism however from some Tories, with former business secretary Jacob Rees-Mogg warning that taxation was “too high”.
Mr Rees-Mogg, who quit when Rishi Sunak became Prime Minister, told Channel 4 News: “I think we need to look at the efficiency of government to make sure money is well spent before reaching for the easy option of putting up taxes.”
The Office for Budget Responsibility (OBR) forecast unemployment would rise by 505,000 from 3.5%, to peak at 4.9% in the third quarter of 2024.
Inflation is expected to be 9.1% over the course of this year and 7.4% next year, contributing to a dramatic fall in living standards.
The OBR’s assessment said: “Rising prices erode real wages and reduce living standards by 7% in total over the two financial years to 2023-24 (wiping out the previous eight years’ growth), despite over £100 billion of additional Government support.”
In an effort to get a grip on the public finances, Mr Hunt set out plans for almost £25 billion in tax increases and more than £30 billion in spending cuts by 2027-28.
The OBR said the tax burden – the ratio of taxes as a share of gross domestic product (GDP), a measure of the size of the economy – would peak at 37.5% in 2025-25 “which would be its highest level since the end of the Second World War”.
Under the tax plans:
– The threshold at which the 45p top rate of income tax is paid will be reduced from £150,000 to £125,140 – although different rates apply in Scotland – meaning someone on £150,000 will pay £1,200 more in tax.
– Some 232,000 more people will be paying the top rate of tax from April 2023 when the change comes into effect.
– An extra 92,000 people will be paying income tax and 130,000 will be paying the higher rate in 2027/28 after thresholds were frozen for a further two years, meaning “fiscal drag” will see increased wages move them into higher tax brackets.
– The now six-year freeze in thresholds will result in a total of 3.2 million new income taxpayers and 2.6 million more people dragged into the higher tax bracket, according to the OBR.
– The windfall tax on oil and gas giants will increase from 25% to 35% and a 45% levy on electricity generators will help raise an estimated £14 billion next year.
– Tax-free allowance for capital gains will reduce in 2023-24 from £12,300 to £6,000 and again to £3,000 in 2024-25.
His package is in stark contrast to his predecessor’s ill-fated plan for £45 billion of tax cuts, less than two months ago, which spooked the markets, pushed up the cost of borrowing and contributed to the downfall of Liz Truss’s short-lived administration.
Mr Hunt said Mr Kwarteng was “correct to identify growth as a priority” but “unfunded tax cuts are as risky as unfunded spending”.
Household energy bills will also increase from April, although Government help will continue.
The energy price guarantee will rise from £2,500 to £3,000 for an average household’s annual energy bill – but Mr Hunt said that would still mean an average of £500 support for every household in the country.
Treasury analysis suggests about 55% of households will be worse off as a result of the tax and spending decisions made in the autumn statement.
The mess we are in is not just a result of 12 weeks of Conservative chaos, but 12 years of Conservative economic failure.
All we got today was an invoice for the economic carnage they have created.
Never again can the Tories claim to be the party of economic competence. pic.twitter.com/FPqkYSz7H2
— Rachel Reeves (@RachelReevesMP) November 17, 2022
But Mr Hunt told MPs he was protecting the vulnerable, including by increasing state pensions, disability and working age benefits by September’s 10.1% inflation figure from next April.
He also announced a 9.7% increase in the national living wage, which will rise to £10.42 an hour from April, meaning a £1,600 pay rise for a full-time worker.
Mr Hunt said he was taking a balanced approach to putting the nation’s finances on a sustainable basis, mixing tax rises and spending cuts.
He said his package met his two new fiscal rules – for underlying debt to fall as a percentage of GDP in five years’ time and for borrowing to be below 3% of GDP over the same period.
But the OBR said higher borrowing pushes underlying debt up to a 63-year high of 97.6% of GDP in 2025-26, before a modest fall due to tax and spending decisions and economic growth.
Mr Hunt has faced Tory criticism over the level of taxes, while political opponents accused him of returning to austerity policies.
But the Chancellor told MPs: “Anyone who says there are easy answers is not being straight with the British people: some argue for spending cuts, but that would not be compatible with high-quality public services.
“Others say savings should be found by increasing taxes, but Conservatives know that high tax economies damage enterprise and erode freedom.”
Blaming a “global economic crisis” for the changes he was introducing, he said “we aren’t immune to these headwinds but with this plan for stability, growth and public services, we will face into the storm.
“There may be a recession made in Russia but there is a recovery made in Britain.”
Other measures announced by Mr Hunt include:
– Government spending will continue to increase in real terms every year for the next five years, but at a slower rate than previously planned.
– Increases in departmental budgets will be protected in cash terms for the next two years, meaning real-terms cuts due to inflation and pressure on public sector wages.
– The defence budget will keep meeting the Nato target of 2% of GDP but the overseas aid budget will not be returned to its goal of 0.7% of national income “until the fiscal system allows”.
– An extra £2.3 billion per year will be invested in schools in England over the next two years.
– The implementation of social care reforms will be delayed for two years.
"The next few years look grim in terms of living standards, the biggest reduction in household incomes, possibly on record and certainly within recent generations."
— Institute for Fiscal Studies (@TheIFS) November 17, 2022
– The NHS budget in England will increase by an extra £3.3 billion in each of the next two years.
The Institute for Fiscal Studies’ Paul Johnson said “most of the difficult decisions on spending have been deferred” until after the next general election.
But he said “the next two years look grim in terms of living standards, the biggest reduction in household incomes – possibly on record, certainly within recent generations”.
Shadow chancellor Rachel Reeves said Mr Hunt’s “stealth taxes” were taking billions of pounds from ordinary working people and “the mess we are in is the result of 12 weeks of Conservative chaos but also 12 years of Conservative economic failure”.