Austerity is pushed back until after the next election amid evidence of higher energy bills and a protracted recession
Britain faces the biggest hit to living standards on record as Chancellor Jeremy Hunt set out £30bn of delayed spending cuts and £25bn of backdated tax increases in an autumn statement that laid bare the country’s dire economic predicament.
Underlining the fragility of the economy, the chancellor pushed back the fresh austerity measures until after the next election amid evidence that higher energy bills and the worst inflation in four decades will cause a protracted recession, a jump in unemployment of 500,000 and a lost decade for living standards.
In a sombre assessment of the economic crisis, the independent Office for Budget Responsibility (OBR) said the biggest two-year squeeze since modern records began – a cumulative drop of 7% – would wipe out the previous eight years of growth in living standards and return them to their 2014 level by 2024.
The OBR said the economy had just entered a recession that would last for more than a year and lead to the economy shrinking by 1.4% in 2023.
Hunt trimmed the budgets of Whitehall departments, broadened the scope of the windfall tax on energy companies, extended the freeze on tax allowances, reduced the threshold for paying the 45% rate of income tax to £125,100, gave local authorities the go-ahead to raise council tax, and raised more from capital gains tax and inheritance tax as part of a plan to convince the financial markets of the government’s intention to reduce its budget deficit.
But Hunt increased spending on the NHS and schools, and deferred most of his tough measures until 2024-25 and beyond, as he stressed the need to avoid a “doom loop” of rising taxes and lower growth.
“We are honest about the challenges and fair in our solutions. Yes, we take difficult decisions to tackle inflation and keep mortgage rises down. But our plan also leads to a shallower downturn, lower energy bills, higher long-term growth and a stronger NHS and education system,” the chancellor said.
The head of one of the UK’s leading thinktanks questioned whether some of the planned austerity would ever happen. Paul Johnson, director of the Institute for Fiscal Studies, said: “The fiscal tightening is heavily back-loaded, with the vast bulk of spending cuts in particular pencilled in for after April 2025.
“Given the profound uncertainty around the outlook, and the potential economic and social costs of an unnecessarily large up-front fiscal tightening, this is probably the right choice, on balance. But delaying all of the difficult decisions until after the next general election does cast doubt on the credibility of these plans. The tight spending plans post-2025, in particular, may stretch credulity.”
Labour said wages adjusted for inflation were lower in 2022 than when the Conservatives came to power in 2010 – a record unmatched since the mid-19th century.
Rachel Reeves, the shadow chancellor, said: “What people will be asking themselves at the next general election is this: am I and my family better off with the Tories? And the answer is no.
“The mess we are in is not just a result of 12 weeks of Conservative chaos, but 12 years of Conservative economic failure: growth dismal; investment down; wages squeezed; public services crumbling.
Labour said taxes on families were set to rise by £120bn since before Rishi was chancellor, equivalent to more than £4,000 per family.
The prime minister faces his first significant electoral test in May’s local elections, with many Tory MPs fearing they will face a dramatic backlash over the cost of living squeeze, which is expected to include council tax rises in 95% of local authorities.
Torsten Bell, director of the Resolution Foundation thinktank, said Hunt’s speech represented a complete change of stance since Kwasi Kwarteng’s badly received mini-budget in September.
“Stepping back, the UK government has gone from announcing the biggest tax cuts in 50 years to the biggest tightening since 2010 in just a few weeks. Today provided the more reality based version – but that reality will feel very tough indeed, as unemployment and energy bills rise, while average incomes fall by £1,700 over this year and next.”
Hunt said a “made-in-Russia energy crisis” had made difficult decisions inevitable. The chancellor reduced the generosity of the government’s energy support package from next April, announced that a reduction in stamp duty for homebuyers would come to an end in 2025, and said owners of electric cars would have to start paying vehicle excise duty.
In what would be the first increase in fuel duty for more than a decade, the OBR also forecast a 23% increase in fuel duty, which would raise almost £6bn, but increase the cost of petrol and diesel by around 12p a litre.
Fuel duty has been frozen since 2011, and was cut by 5p a litre in the spring statement last year, a measure that is due to expire at the end of March.
It was not mentioned in Hunt’s autumn statement, but the forecast said 12p a litre would be added to pump prices if the government did not act to freeze the duty again. The Treasury said no decision had yet been made on fuel duty rates for next year.