Jeremy Hunt's plan to fix the UK economy is not going to work, according to the bond market. The UK economy is already in a recession, and the chancellor's monetary and fiscal policy measures are tightening at a time when the economy is already struggling.
Jeremy Hunt's plan to fix the UK economy is already in a recession
Jeremy Hunt has laid out plans to fix the UK economy, including a raft of tax rises and spending cuts. But Britain is already in recession and its economic growth will slow down. And if it continues to go into deep contraction, it will push 500,000 people into unemployment.
Hunt's plan is designed to repair the government's finances, but it will also raise taxes on millions of Britons. His plan sets up a major political battle at the next election, due in 2024. He has pledged to raise a total of 55 billion pounds, almost half of which comes from tax increases.
Britain is already suffering economically, with inflation hitting a 41-year high in October. The cost of living is eating into people's wages. And as a result, the economy is expected to shrink by 1.4 per cent next year. The government forecasts growth of only 2.6% in 2025 and 2.7% in 2026.
Hunt's plan includes a series of tax increases and spending cuts, including a temporary 45% tax on electricity generators, a levy on energy companies' profits and changes to the income tax threshold. The UK Office for Budget Responsibility (OBR) estimates that inflation will rise to nearly nine per cent this year, while household disposable income is expected to fall by seven per cent in the next two years.
Fiscal policy and monetary policy are being tightened at a time when the economy is already struggling
During the past two years, the Federal Reserve has made adjustments to its monetary policy, including lowering the federal funds rate target to zero and raising the target by 0.5 percentage points. These actions have aimed to reduce the inflationary pressures in the economy.
However, the current pace of inflation is still elevated, and it has reached the highest levels in four decades. The Federal Reserve's long-run goal is to achieve price stability. Higher real interest rates will reduce household spending and business investment. They will also decrease competitiveness in the global market.
Several governmental programs are available to increase economic growth. The government can cut taxes or spend more on programs that promote economic activity. However, this can be politically unpopular. A government deficit, which occurs when the government spends more than it takes in, can widen to dangerous levels. This can reduce the confidence in the dollar as an international reserve currency.
Government spending will exceed revenues in 2021. In 2022, the budget deficit will decrease, but it will rise again in 2023 and 2032. The CBO projects that the deficit will be 4.1 percent of GDP in 2021, 3.7 percent in 2022, and 6.1 percent in 2032.
The federal debt is expected to increase to 110 percent of the economy in 2032. This rise in debt will increase the deficit. The increase in debt will also cause net interest outlays to increase rapidly through 2052.
The bond market's judgment is likely to remain "deeply unfavorable"
Despite the oomph factor of the UK's fiscal plan of record, the bond market isn't too excited. The new Chancellor of the Exchequer has enlisted the aid of a raft of stealth taxes to plug the country's fiscal woes. These include a 45% tax on electricity generators, a levy on energy companies, and a freeze on income tax thresholds until April 2028.
The UK is in a recession and its growth prospects are set to dwindle over the next few years. The Office for Budget Responsibility has estimated that GDP will contract by 1.4% in 2023. That is a big deal considering the UK is the only G-7 nation that hasn't fully recovered from its recession.
A new Chancellor of the Exchequer, Jeremy Hunt, delivered the U.K.'s Autumn Statement on Thursday. While he delivered the big daddy of budgets, the budget that's most likely to be voted as the next UK Prime Minister is likely to be a lot smaller. This will mean fewer goodies for voters.
Despite this, the new Chancellor of the Exchequer unveiled the biggest and best budget of his illustrious tenure, including the first ever NHS hospital construction project in the country, as well as a new Northern Powerhouse rail line to boost productivity.
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