UK delays budget as new PM tries to resolve economic crisis

The UK government has delayed its budget by more than two weeks, buying new Prime Minister Rishi Sunak some time to make tough choices on how to tackle the country’s “deep economic crisis”.

Finance Minister Jeremy Hunt will now deliver the government’s medium-term fiscal plan on Nov. 17, according to a Treasury statement. It had been scheduled for October 31 after the date was pushed forward by more than three weeks in a desperate attempt to reassure investors frightened by the massive unfunded tax cuts promised by former prime minister Liz Truss.

Sunak, Britain’s third prime minister in seven weeks, took office on Tuesday with a promise to right the “mistakes” committed by Truss.

He told lawmakers on Wednesday that the government would have to make “difficult decisions to restore economic stability and confidence.”

“But what can I say – as we did during Covid – we will always protect the most vulnerable, we will do it fairly,” Sunak said. “Leadership is not selling fairy tales. It is facing challenges and that is the leadership that the British people will get from this government,” he added.

Truss’s ‘mini’ budget of 23 September sent the pound pounding and causing a rout in the bond market, pushing up borrowing costs in the UK – including mortgage rates.

While Hunt has already scrapped most of those tax cuts, restoring a sense of calm to markets, investors remain eager to understand how the government plans to deal with its growing debt burden in the midst of a recession.

filling the hole

There are no easy solutions. To reduce debt as a share of the economy, the government needs to find between £30 billion (US$34.7 billion) and £40 billion (US$46.3 billion) over the next five years, according to calculations by the Institute for Fiscal Studies ( IFS), an influential think tank.

The only way to plug the hole is to cut public spending or increase revenue by raising taxes. Both are likely to prove highly unpopular with British voters facing a worsening cost-of-living crisis as food and energy bills soar.

One area Sunak might be tempted to explore is the social welfare budget. Doubts have arisen over whether the Conservative government can try to avoid raising state benefits in line with inflation, as usual, and instead link the increase to average earnings, which are not rising as fast as prices.

This could save £7 billion ($8 billion) in 2023-24, according to the IFS, but it would be controversial.

A more palatable option, at least for families, would be to extract more taxes from corporations. Hunt has already said that corporate taxes will rise from 19% to 25% next spring and is open to the idea of ​​unexpected taxes on banks and oil and gas companies.

The risk, however, is that spending too little or raising taxes too much could exacerbate Britain’s recession. A weak economy will only make debt and spending problems worse.

According to Hunt, the budget, when it arrives, will define how the government intends to reduce debt over the medium term. At a Cabinet meeting on Wednesday, Hunt said he would be accompanied by a full review of the government’s plans for growth and spending by the UK’s watchdog, the Office for Budget Responsibility.