Britain’s economy will shrink by two per cent in a recession that started during the previous quarter, the U.K.’s budget watchdog has warned in a report issued Thursday.
The Office for Budget Responsibility (OBR) forecast on Thursday the recession will last roughly one year, and that Britain’s economy would not reach its pre-pandemic size until the final quarter of 2024.
“Rising prices erode real wages and reduce living standards by 7 per cent 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,” the office’s report warned.
“The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022, with a peak-to-trough fall in GDP of 2 per cent.”
On Friday, Britain’s Conservative government defended its decision to hike taxes for millions of working people in the “squeezed middle” class as it tries to shore up an economy battered by double-digit inflation and the reckless tax-cutting of recently ousted Prime Minister Liz Truss.
An emergency budget announced by Treasury chief Jeremy Hunt on Thursday includes 25 billion pounds ($30 billion) in tax hikes, including higher income tax for middle and top earners and steeper local household taxes.
In announcing the plans, Hunt said the OPR has judged “that the UK, like other countries, is now in recession.”
The Treasury acknowledged that the moves will take taxes as a share of national income to its highest level since World War II.
The combination of high inflation — predicted to be 9.1 per cent for 2022, largely driven by soaring energy costs from Russia’s invasion of Ukraine — and stagnating salaries means a seven per cent decline in U.K. living standards over the next two years, the government’s fiscal watchdog said.
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“The truth is, we just got a lot poorer,” Paul Johnson, director of the Institute for Fiscal Studies think tank, said.
“We’re in for a long, hard, unpleasant journey,” he added, with “high borrowing, high debt, high tax and public spending under strain.”
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Hunt reversed the billions of pounds in unfunded tax cuts announced by his predecessor Kwasi Kwarteng less than two months ago — a package that spooked financial markets, sent the pound plunging to a record low against the U.S. dollar and forced emergency intervention from the Bank of England.
Hunt also renounced the central principle touted by Kwarteng and Truss: that lower taxes are the key to economic growth.
“Sound money matters more than low taxes,” he said. “None of this is easy, but it’s the right thing to do.”
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The emergency budget largely postponed public spending cuts until 2025 — after the next national election — and promised more money for key areas including education and health. Hunt also included help for British society’s most vulnerable, raising pensions and welfare benefits in line with inflation and boosting the minimum wage by 9.7 per cent.
But millions of people in the U.K. face higher energy bills in the spring, when the government plans to cut back on support that has capped the average household’s utility bill at 2,500 pounds ($3,000) a year — more than double what it was a year ago.
Bills are expected to increase to 3,000 pounds ($3,575) a year on average.
Consumer affairs expert Martin Lewis said the worst is still to come for many people.
“Next spring, we are going to have this perfect storm of energy bills going up, cost of living continuing to rise and energy bills at their peak,” Lewis told radio station LBC. “My concern is what do we do to get people over that hump.”
With files from The Associated Press and Global News.
