LONDON--Britain faces a record hit to living standards this year as surging inflation erodes incomes, the country's budget forecasters warned, after finance minister Jeremy Hunt announced more pain, with tax rises now and spending cuts further ahead.
In a bid to restore Britain's fiscal reputation after the chaos caused by former prime minister Liz Truss's plans for sweeping tax cuts, Hunt outlined a budget programme on Thursday to save 55 billion pounds a year to fix the public finances. Almost half the belt-tightening is due to come from tax increases, prompting some protests from within Prime Minister Rishi Sunak's ruling Conservative Party, which faces a national election within two years.
Already struggling to adjust to life outside the European Union, Britain's economy was suffering from high inflation and a slowing global economy even before Truss sent financial markets into convulsions. It is the only Group of Seven economy yet to recover its pre-COVID size and income growth was near-stagnant for a decade ahead of the pandemic.
The Office for Budget Responsibility said household disposable incomes would fall by 4.3% in the current financial year and by 2.8% in 2023/24, the sharpest declines in records dating back to the 1950s. That two-year slump would wipe out all the growth in living standards over the eight years to 2022, the OBR said.
Millions of Britons are already grappling with a cost of living crisis. Inflation was 11.1% in October, a 41-year high.
But Hunt said painful fiscal medicine was needed for Britain to maintain the recent return of calm to financial markets, even if most of the belt-tightening is delayed until past 2024, when the next national election is expected. The OBR said the tax burden was on course to reach 37.1% of GDP in five years' time, its highest sustained level since World War Two, up from 33.1% in the 2019-20 tax year.
"Credibility cannot be taken for granted and yesterday's inflation figures show we must continue a relentless fight to bring it down, including an important commitment to rebuild the public finances," Hunt told parliament.
Hunt said the economy was already in recession and set to shrink next year as it struggles with inflation forecast to average 9.1% this year and 7.4% in 2023 before falling sharply. Sterling was down 1.1% against the dollar and 0.5% against the euro at 4:40 p.m., as investors assessed the scale of retrenchment, which looked more severe than anything planned by other big rich economies.
"The UK remains somewhat of a difficult place to judge right now," Marcus Brookes, chief investment officer at Quilter Investors, said. "We are not necessarily at the end of the train of bad news and with a prolonged recession priced in we may need to wait for a more sustained downward path of inflation."