Introduction: Hunt warned against excessive austerity
Good morning and welcome to our continuing coverage of business, financial markets and the global economy.
Almost two months after the turmoil caused by the mini-budget, Chancellor Jeremy Hunt will announce a series of tax rises and spending cuts to reassure markets that the UK is in responsible hands.
Today’s Autumn Statement is expected to outline plans to cut public spending by around £30bn, along with £24bn of extra tax.
But many of the tough decisions may be put off until after the election, creating a political headache for Labour.
Hunt is also expected to increase benefits, pensions and inflation tax credits, meaning a 10% increase next April.
But support for energy bills will be reduced; the average annual bill could rise to £3,000 in the spring, from the current cap of £2,500, along with a windfall tax on power generators.
So, having reversed many of the measures in the mini-budget, Hunt is set to take the UK down a completely different path to Kwasi Kwarteng.
Fall Statement:
£30bn of spending cuts, £24bn of tax rises
Stealth records a great theme as thresholds freeze
Energy bills will increase from April. Support will continue, but will be reduced.
Spending pressures
Pensions and benefits in line with inflation https://t.co/knk4RNDz1o
— Nick Eardley (@nickeardleybbc) November 17, 2022
But will markets prefer austerity 2.0, rather than the unfunded fiscal easing of Trussonomics that sank the pound and drove up borrowing costs?
Mohamed El-Erian, president of Queens’ College Cambridge and Allianz’s chief economic adviser, says Hunt faces a very tricky balancing act.
He told Radio 4’s Today program that markets will be looking for confirmation that the UK is restoring its economic reputation and getting its finances back on track. But investors also worry about growth.
El-Erian said:
They will also seek measures to promote economic growth.
It will be very difficult to strike the right balance, as there are so many economic and political judgments involved.
And he agreed that Hunt risks going too far the other way, if he simply announces big tax hikes and spending cuts.
El-Erian warned:
It could be seen as excessive austerity.
At the end of the day, the answer to all the problems facing the UK today, from inflation to low growth and a damaged economic reputation, is high, sustained and inclusive growth.
It is “absolutely critical” that the government delivers a package of measures to improve productivity and promote high economic growth, he added.
The Bank of England yesterday warned that the UK is underperforming its rivals due to Brexit and a sharp fall in the size of the workforce since the Covid pandemic.
Andrew Bailey also told MPs that the UK’s international reputation has been damaged by September’s mini-budget.
El-Erian agrees that the UK certainly has a credibility problem.
But the bigger question is how big the fiscal black hole really is, and about the size of Hunt’s fiscal measure, the timing and balance of spending and tax cuts.
He says:
There is concern that a political agenda and an economic agenda can be played.
the agenda
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9.30am GMT: ONS weekly economic activity and business insights
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9.30am GMT: ONS report on UK GDP, by region and country: January to March 2022
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10:00 GMT: October Eurozone inflation reading
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Late morning: Jeremy Hunt makes autumn statement
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13:30 GMT: Weekly US jobless claims
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13:30 GMT: US building permits data
Updated at 08.05 GMT
Key events
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Key Events (8)Jeremy Hunt (7)UK (6)Kwasi Kwarteng (5)Treasury Select Committee (3)Liz Truss (3)
Investec: politics and economics pulling in fundamentally different directions
It’s an understatement to say Jeremy Hunt faces a difficult balancing act today, says Investec economist Phil Shaw.
Politics and economics are pulling in fundamentally different directions: the obvious need to help in light of the cost-of-living crisis, which underpins much of the current wave of industrial action, collides with the hard truth that markets need to see public finances. staying on a sustainable basis.
As the Truss administration discovered, the latter is not negotiable and cannot be easily put into the long grass: credibility must be strengthened, to avoid volatility returning to markets and the spikes in yields that can worsen the conditions of the entire economy in the short term. space of time
Jo Michell, associate professor of economics at Bristol Business School, notes that the excuse for new austerity appears to have changed:
The emphasis seems to have shifted from “black holes” to “market confidence” and “inflation”.
— Jo Michell (@JoMicheII) November 17, 2022
Hunt: We’re making tough decisions
The Treasury has released a video to set the stage for the Autumn Statement, featuring several Cabinet members.
To ominous drumbeat, Chancellor Jeremy Hunt said:
“Today we must make difficult decisions to restore stability, reduce inflation and balance the nation’s accounts.
“So this is our plan to build a stronger economy, protect public services and make sure we look after the most vulnerable.”
The plan will include supporting the most vulnerable as their energy costs rise, says business secretary Grant Shapps, and “asking energy companies to pay their fair share” (this could be a windfall tax on electricity producers ).
The United Kingdom is facing the effects of the global economic crisis.
Hard decisions must now be made to reduce inflation – the hidden tax that is injected into family budgets.
The Council of Ministers has explained why we prioritize stability, growth and public services ⬇️ pic.twitter.com/VOUg5AMBeh
— HM Treasury (@hmtreasury) November 17, 2022
Education Secretary Gillian Keegan said the investment would focus on “skills and ensuring the British people have access to more opportunities”.
While health secretary Steve Barclay said it “delivers on our promise for a stronger NHS and tackling Covid delays”. Yesterday, Barclay hinted that the Autumn Statement will involve giving more money to the NHS.
Home Secretary Suella Braverman said the Government was “making our streets safer, supporting our security services and controlling migration”. (although his £63m deal with France to reduce the number of people trying to cross the Channel in small boats has been condemned by trade unions, refugee groups and some Tory MPs).
And Prime Minister Rishi Sunak echoes the point about restoring stability, saying:
“Today’s declaration will help provide the long-term stability this country needs.”
Hunt ‘risks setting back economic recovery’
The most famous quote about bonds comes from Bill Clinton’s chief strategist, James Carville.
Carville joked that if he were reincarnated, he’d like to come back as a bond market, rather than a president, pope or baseball star, because then “you can bully everybody.”
Kwasi Kwarteng and Liz Truss can confirm: they lost control of Downing Street after the bond market flexed its muscles, sending UK borrowing costs soaring.
Photograph: Bank of England
But Jeremy Hunt risks worsening the recession by cutting spending and raising taxes to try to appease bond watchers in the City.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says:
The UK government’s autumn statement will mark a complete U-turn on the Truss administration’s plans for a sugar rush boost to growth through tax cuts that sent bond markets into chaos and saw increase the UK risk premium. Gold yields have fallen significantly since the September scare that threatened to destabilize the UK financial system, and the Sunak administration is desperate to maintain credibility.
With all these steps, the government hopes to plug the fiscal “black hole” that has emerged because successive Tory ministers have said they want net debt to fall by 2025-26. Sunak and Hunt are trying to dance to a tune they think the bond markets are playing, but by sticking so strictly to their perceived rules, they risk playing it too safe and pushing the prospects for economic recovery too far. ”
The UK faces an unpleasant economic outlook
Economists predict that the Office for Budget Responsibility will paint a very bleak economic picture in its forecasts today.
Sanjay Raja, senior economist at Deutsche Bank, says:
Expect a deep and prolonged recession in 2023 with growth likely to remain subdued until 2025 at the earliest. Inflation projections will also increase significantly, with more persistence in the OBR’s projections.
And on the labor market side, we expect the OBR to forecast a slow labor force recovery, with the unemployment rate hovering around 5.5% to 6% over the next two to three years.
All in all, the difficult economic outlook is likely to underline the main reason for the size of the fiscal hole, with our borrowing projections rising slightly above £90bn in 2026/27. [compared with £32bn after the Spring Statement].
Photograph: Deutsche Bank
Torsten Bell, executive director of the Resolution Foundation think tank, also expects some “pretty bad economic news.”
Bell told Sky News that the UK faced a “dismal economic outlook”, with the economy growing very slowly and “possibly ending this Parliament as weak as it started”.
He added that this would be “much weaker than we expected”, and also predicted that unemployment would rise.
The UK’s tax watchdog will today publish its latest outlook on the economy and public finances, alongside the chancellor’s autumn statement.
Kwasi Kwarteng’s refusal to allow the Office for Budget Responsibility to evaluate his planned tax cuts contributed to market chaos following the mini-budget as investors judged the…