London bets on growing budgets under debt pressure

By William Schomberg

LONDON, March 15 (Reuters) – Britain’s Chancellor of the Exchequer Jeremy Hunt will announce plans on Wednesday to try to revive the world’s sixth-largest economy after the impact of Brexit, the severe setback from COVID-19 and rising double-digit inflation leave it behind other countries.

Hunt, who is due to deliver a budget speech in Britain’s parliament at around 12.30pm GMT, rejected calls from fellow MPs in the ruling Conservative Party for deep tax cuts to improve his electoral prospects ahead of a scheduled election in here 2024.

Hunt, who took over as finance minister late last year to reverse former Prime Minister Liz Truss’s plans for an unfunded tax cut, explains the rise in borrowing costs after the “mini-budget”. The previous administration clarified the limits of relying on the bond market to finance its future growth.

Instead, Hunt, gripped by his promise to reduce Britain’s 2.5 trillion pound ($3 trillion) debt burden, will try to tackle some of the causes of the long-term economic crisis of Great Britain.

“In the fall, we made tough decisions to ensure stability and healthy funding,” Hunt will say, according to the opening excerpts of his speech. “Today we are presenting the next part of our plan: a budget for growth.”

Britain is the only Group of Seven country where output remains below its pre-pandemic size, putting pressure on Hunt and Prime Minister Rishi Sunak at a time when the opposition Labor Party is well ahead in the opinion polls.

Finance Minister Labor hopeful Rachel Reeves tried to keep the pressure on Hunt by calling for urgent action now.

“With 13 years of economic mismanagement and a policy of blind sticks that has left us behind, what we need is real ambition from government,” Reeves said.

Ruling out a big spending spree or big tax cuts, Hunt will address the acute shortage of available labor by changing childcare and welfare rules, which he says will will help put hundreds of thousands of people back to work.

According to The Guardian newspaper, Hunt will announce a £4billion extension to subsidized childcare for one and two-year-olds in England.

He is also expected to announce measures to improve vocational training and give the green light to 12 investment zones.

Labor last week attacked the government’s ‘chaotic’ approach to corporate taxation, with the corporate tax rate due to rise from 19% to 25% next month.

In an attempt to lessen that fiscal impact, Hunt hinted at new incentives for business investment.

He is also under pressure from trainee doctors, teachers and other public sector workers who, demanding higher wages, went on strike on Wednesday in one of the largest coordinated walkouts in decades. The armed forces also say they need more money to support Ukraine in its war against Russia.

MORE HELP WITH THE ELECTRICITY BILL

In the short term, households, suffering from high inflation and the tax hikes announced by Hunt in November, will benefit from a three-month extension of subsidies on energy bills. Hunt is also expected to extend the fuel tax freeze.

According to the UK Department for Economics and Finance, the budget will also provide more support for businesses to meet the cost of living.

However, many economists believe Hunt will only use half of the £30billion public finances recently received, saving ammunition for the approach of the next election.

At just under 100% of gross domestic product, UK public debt is slightly above the eurozone average, but well below that of the G7, which includes Japan, where the ratio is over 200%.

Hunt’s future options could be even more limited if Britain’s tax watchdog becomes more pessimistic about the economic outlook.

Forecasts suggest the UK will suffer a recession less severe than the 1.4% predicted by its Office for Budget Responsibility (OBR) for 2023 in its November forecast. However, growth forecasts after this date could be revised downwards, which would reduce tax revenues.

Bond traders polled by Reuters expect government borrowing to fall to £125bn in FY23/24, from £140bn or 5.5% of GDP forecast in the OBR in November.

(1 dollar = 0.8222 pounds)

(Writing: William Schomberg; Graphics: Vincent Flasseur; Editing by Alison Williams and Andrew Heavens, Editing in Spanish by Tomás Cobos)