Economy

Jeremy Hunt’s Autumn Statement had two audiences: creditors and voters. It needed to convince the former that the UK government can be trusted with their money and it needed to convince the latter that the Conservative government is doing its best to limit the damage to them and their families from a global economic storm.So far the chancellor seems to be doing rather well on the first objective. Nonetheless, the costs of debt service have risen substantially. The government has taken sizeable actions to deliver on the second, too. But the blow to household real disposable incomes will still be enormous. Meanwhile, he has adopted yet another set of fiscal targets and pushed the austerity designed to achieve them into the years after the next election. Those promises of future fiscal chastity cannot be taken seriously. They may or may not be delivered. But no parliament can bind its successor.What is certain is the impact of the Russian aggression against Ukraine. This is the main explanation for the huge revisions in the Office for Budget Responsibility’s forecasts since last March. The decision of Liz Truss and Kwasi Kwarteng to launch large unfunded tax cuts and spending increases at such a juncture, while repudiating input from the OBR and the Bank of England, was insane. Hunt went out of his way to laud these institutions: sanity, he emphasised, is back. So far, happily, creditors agree. The so-called “moron premium” on UK bond yields has melted away. Nevertheless, the jump in debt service costs will be huge: according to the OBR, government spending on interest will jump from 1.2 per cent of gross domestic product in 2020-21 to 4.8 per cent in 2022-23. The rise in interest rates is a response to inflationary pressures. These are just one of the economic problems caused or exacerbated by the global jump in energy prices, which itself came on top of the post-Covid rise in the prices of goods. The energy shock is not just inflationary. It is also contractionary for GDP and even more so for real incomes, since it has increased the cost of imports hugely relative to those for exports. The result is a huge fall in forecast economic growth and an even more dramatic squeeze on household incomes.The elements in this overall picture are startling. The OBR expects inflation to peak at a 40-year high of 11.1 per cent in the fourth quarter of 2022, revised up from a forecast of 8.7 per cent in March. It also expects the economy to enter a recession lasting just over a year from the third quarter of 2022 (namely, now). By the first quarter of 2027, it says, “cumulative growth in real GDP since the fourth quarter of 2019 is 3.4 percentage points lower than in our March forecast”; 2.4 percentage points of this is due to lower cumulative growth over the forecast period. Moreover, the bulk of that is due to lower potential growth and so is likely to be permanent. Worst of all is what is going to happen to household real disposable incomes. “On a fiscal year basis,” says the OBR, these fall “by 4.3 per cent in 2022-23, which would be the largest since ONS records began in 1956-57. That is followed by the second largest fall in 2023-24 at 2.8 per cent.”These huge reductions in living standards occur despite massive spending on support: the fiscal measures since March are forecast to raise real household disposable incomes per person by 4.5 per cent in 2022-23 and 2.5 per cent in 2023-24. The impact on the public finances comes not only from the recession, but also from spending targeted at reducing the burden on households. Additional spending announced since March amounts to £103bn from 2022-23 to 2024-25. The offsetting increases in taxes and cuts in spending only begin from 2024-25 (for taxes) and 2025-26 (for spending). The government will be giving away money hugely over the two years running up to the election. Fiscal targets will, not surprisingly, be missed once again. Indeed, public sector net debt is now forecast to hit a 63-year high of 97.6 per cent of GDP in 2026-27, against a forecast of 78.9 per cent only last March. This is indeed a huge storm.Is there some good news? Yes, the OBR thinks inflation may go negative in 2024. If so, interest rates might plummet. The Ukraine war might end sooner than is now expected, though the chances that this will reverse the squeeze on gas supplies look small. In all, this is about weathering a storm that will be very painful for a large portion of the public. Could the government have done more to cushion the blow? Only by being willing to raise taxes even more.The longer run questions are almost inevitably left to one side. There is certainly nothing to suggest radical new thinking on growth. Worse, the crisis is imposing a big hit to already weak business investment, while the government plans to cut capital spending, too. These cuts are sure to show up in longer-term weakness in potential output.Yet there are things that can be done cheaply. The most important achievement of Hunt and Rishi Sunak is to reintroduce a degree of coherence and predictability into policymaking. That must surely now be extended to our relationship with our most important economic partner, the EU. The era of Brexit fantasy needs at last to be put behind us. At the very least, and especially at a time of such radical uncertainty, the doubts over future trading relationships must be ended. So, let us agree on Northern Ireland, abandon totemic discord, reach as close and credibly stable an economic relationship with the EU as is possible, and then move on. It is high time for us to do [email protected] Martin Wolf with myFT and on Twitter More

UK households and businesses will pay much more for their energy next year as the government cuts subsidies designed to mitigate soaring gas and electricity costs, chancellor Jeremy Hunt has said. In his Autumn Statement on Thursday aimed at shoring up the national finances, the chancellor said state support for household energy bills would be extended for 12 months from April. But the government will increase the cap for a household with typical usage to about £3,000 a year from the subsidised level of £2,500 this winter.It said the majority of businesses would not receive extra support beyond April, arguing that subsidising their costs was “not sustainable”. Typical households will from April be paying almost three times as much as last year. They will be paying about £900 more than in 2022, taking into account a one-off, blanket £400 discount provided by the government this year. Businesses could be hit by even larger rises once government subsidies are removed.The increase in the household cap will free up £14bn of savings compared with the original policy set out by Liz Truss’s government. Most of that money will go towards additional support targeted at the most vulnerable groups, including people on benefits, pensioners and the disabled.The announcements came as Hunt outlined a £55bn consolidation aimed at reassuring investors about the UK’s fiscal credibility, while addressing the pressures of the cost of living crisis. The government said that while households would receive support until April 2024, it was “not sustainable for government to continue supporting large numbers of businesses” beyond next spring.Instead, ministers will withdraw support for most corporate energy consumers from March 31, after which the government will only offer “significantly lower” help for the most vulnerable industries. UK businesses have warned of a “cliff edge” this spring without extra help, but the government wants industry to make efforts to reduce consumption and find alternative solutions.“The government recognises that some businesses, such as those which are highly exposed to energy prices and unable to pass through or absorb these costs sufficiently, may continue to require support beyond March 2023,” the Treasury said.“However, the overall scale of support the government can offer will be significantly lower, and targeted at those most affected to ensure fiscal sustainability and value for money for the taxpayer.”The government could amend the household energy support scheme, potentially lifting the capped level above £3,000 if another sharp rise in wholesale gas prices necessitates it. Households with very high usage are also likely to find their support curbed after April, the government said.Truss in September announced energy bills for the typical household would be limited to £2,500 for two years, with the government absorbing the difference between the capped unit price and higher wholesale costs. But after Hunt was appointed chancellor in October in a failed bid to save her premiership, he cut the duration of the scheme to six months, citing concerns about affordability.The government has been helped by a drop in gas prices in recent weeks. Total spending on household and business energy support was originally projected to be £60bn over six months this winter, but has since fallen to about £43bn.Hunt said the UK needed to pursue “energy independence” and recommitted to the Sizewell C nuclear project and boosting the build-up of renewable energy sources. He also unveiled an ambition to cut national energy consumption by 15 per cent by 2030. He pledged £6bn of capital spending on an insulation programme for Britain’s draughty housing stock in the three years from 2025. That would represent an increase in the government’s current insulation programme, under which £6.6bn is being spent over five years.

The government has been criticised for the failure of its Green Homes Grant. Aimed at kick-starting the decarbonisation of homes, the £1.5bn initiative was launched in September 2020 but was scrapped just six months later. Environmental campaigners suggested the new policy fell short of prime minister Rishi Sunak’s pledge during this summer’s Tory leadership race to “turbocharge” the rollout of home insulation.“What is missing is a ramp-up of funding now to insulate more homes in the next two years as energy bills go through the roof,” said Juliet Phillips at climate change think-tank E3G.   More

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Chancellor Jeremy Hunt announced £55bn of tax rises and spending cuts to restore the UK’s public finances. However, public sector debt as a share of GDP is set to rise on the back of a worsening economic outlook and higher borrowing costs. The country has already entered a recession that is set to last more than a year.UK output is not set to reach pre-pandemic levels until the end of 2024, in sharp contrast with all other G7 economies, which have already regained the ground lost during the Covid era. As a result, households face the largest fall in living standards since records began in the 1950s. Most of the rises in taxes and a big squeeze on public spending are planned for the years after the general election, which must be held by 2024. One of the largest increases in taxation, the freeze in national insurance thresholds for businesses, will take effect from April 2023.The UK’s economic outlook is bleak . . . Gross domestic product is set to contract by 1.4 per cent in 2023;The economy is already in a recession that will last more than a year;Output is set to recover to pre-pandemic levels only in the last quarter of 2024;Real disposable income per person, a measure of living standards, is set to fall this fiscal year at the fastest pace since records began in the 1950s. That will be followed by the second largest fall in 2023-24, taking household incomes to their lowest since 2013-14;The unemployment rate is set to rise from the current 3.6 per cent to peak at 4.9 per cent in the third quarter of 2024. . . . And worse than other major economiesAll other G7 economies have already recovered to pre-pandemic output levels;The OBR’s forecast contraction in UK GDP for 2023 is the worst among the G7, according to the latest IMF forecasts;UK inflation is set to average 7.4 per cent next year, higher than in any other G7 economy, according to the IMF.UK public sector debt is rising . . . Public sector debt is set to peak at 97.6 per cent of GDP by 2025-26, up from the 80.9 per cent that was forecast in March;Public sector debt dips only marginally to 97.3 per cent in the fiscal year 2027-28. . . . And borrowing is upPublic sector net borrowing is set to rise to £80.3bn by the fiscal year 2026-27, £48.8bn higher than forecast in March;Higher debt interest payments contribute to higher borrowing. In the fiscal year 2022-2023 debt interest payments double to £108.5bn, from the £50.6bn forecast in March;As a proportion of GDP, borrowing rises to 7.1 per cent in the fiscal year 2022-23, from 3.9 per cent forecast in March.In response, the chancellor cut spending and increased taxes There is modest fiscal easing over the next year via cost of living support and the government will cap household energy prices for another year from April, albeit at a higher level than currently;National insurance thresholds for businesses will be frozen from April 2023;The threshold for the 45 per cent top rate of tax was cut from £150,000 to £125,000;A windfall tax on energy companies will raise £14bn next year; From April 2025, electric cars, vans and motorcycles will begin to pay road tax in the same way as petrol and diesel vehicles;From 2023 to 2028 there will be a 45 per cent levy on electricity generators, targeting the excess profits made by renewable and nuclear operators since Russia’s invasion of Ukraine;The tax-free allowance for income tax and national insurance will remain at £12,570 until 2028;The inheritance tax threshold, which has been at £325,000 since 2009, will be held at this level until 2028;The dividend allowance drops from £2,000 to £1,000 next year, then to £500 from April 2024;The stamp duty tax cuts introduced by former chancellor Kwasi Kwarteng in September will expire in March 2025;Public spending will rise by only 1 per cent in real terms in the next parliament, raising £21bn;Capital spending will be frozen in cash terms, raising £14bn;As a result of all these measures, by 2027-28 Britain will have a tax burden of 37.1 per cent of GDP, a postwar record.

Video: The Brexit effect: how leaving the EU hit the UK More

Millions of people face a bigger jump in council tax bills next year as a result of an announcement in the Autumn Statement — but local authorities warned this would not plug a looming hole in local government finances. Labour accused Jeremy Hunt of seeking to make councils “take the blame” for a new round of austerity after the chancellor gave authorities permission to lift council tax faster.Until now councils were prevented from raising annual council tax by more than 2.99 per cent without a local referendum.However, Hunt has given the green light to local authorities to automatically raise the levy — which is paid according to the size of a home — by up to 4.99 per cent.Rachel Reeves, shadow chancellor, said the government was “forcing” councils to raise council tax, with the typical band D family home now paying more than £2,000 a year for the first time.“Local people . . . will be forced to pay more because of the destruction that the Tories have wreaked on our economy at a time when councils are already in dire straits because of a lack of support from central government,” she said.“Now, they probably sat around their table in Downing Street, thinking this was some clever trick: make the councils take the blame.”James Jamieson, chair of the Local Government Association, said the policy would not on its own solve “the long-term pressures facing services — particularly high-demand services like adult social care, child protection and homelessness prevention. It also raises different amounts of money in different parts of the country unrelated to need and adding to the financial burden facing households.”In Salford, the 16th most deprived authority in the country, an increase of 5 per cent — rather than 3 per cent — would raise £2mn, said the city’s mayor Paul Dennett. This compared with £14mn in wealthier Surrey. Patrick Melia, finance lead at the Society of Local Authority Chief Executives, warned the mechanism was “a hugely imprecise” way of increasing revenue “that will raise wildly varying amounts across the country”. “There are very few savings options left,” he added. “You can’t cut services twice.” Tim Oliver, chair of the County Councils Network, added that a reduction in planned funding growth from 2025 could be “extremely difficult” for local services, which were already under immense pressure.“Unless government addresses inflation next year, and the economy picks up before 2025, councils’ funding shortfall will grow year-on-year and become unsustainable.”

Rebecca McDonald, chief economist for the Joseph Rowntree Foundation, said families faced a “frightening obstacle course just to afford the essentials” this winter. “Rises in council tax, food and rents are all looking insurmountable for large swaths of the population,” she said.Jonathan Carr-West, chief executive of the Local Government Information Unit, said the Autumn Statement offered “limited respite” for councils. “Well-run councils will fail unless something changes,” he said.Allowing authorities to lift council tax was a “regressive tax which will hit the poorest the hardest and shift political liability from central to local government”, he added. More

UK households are set to suffer a 7.1 per cent fall in living standards over the next two years, the largest decline in six decades, according to new forecasts from the Office for Budget Responsibility. Surging inflation, rising mortgage costs, falling property prices and higher unemployment are battering household finances, with the OBR projecting that real disposable income will fall by 4.3 per cent in the 2022-23 fiscal year, the biggest drop since records began in 1956-57. This would be followed by the second largest fall on record, at 2.8 per cent, in 2023-24, taking the cumulative hit to 7.1 per cent, it said.Richard Hughes, the OBR’s chair, said the falls would “wipe out the last eight years of improvement” in living standards, with people’s incomes remaining more than 1 per cent below pre-pandemic levels even at the end of 2027-28.Economic output, meanwhile, was expected still to be below its pre-pandemic peak by the end of the current election cycle in 2024.

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The slump will coincide with a tapering of the government’s support for households’ energy bills and its lump sum payments to poorer households, although it has confirmed a commitment to raise benefits in line with inflation. This fiscal support tempers the hit to households and limits the scale of the recession the UK faces over the next two years, with tax increases biting harder later on.Meanwhile, a tight labour market means unemployment is set to rise less than typically in a recession, peaking at 4.9 per cent midway through 2024 — although this is still equivalent to half a million job losses. The OBR said the government’s energy price guarantee, combined with the various cost of living support packages announced since March, had reduced the hit to household incomes over the two-year period by about a quarter, while also limiting the economy’s contraction. But it still believes the economy has already entered a punishing recession that will last for more than a year, with a peak-to trough fall in output of 2.1 per cent starting from mid-2022. Hughes said this meant a downturn “similar in depth to that seen in the recession of the 1990s”, although much shallower than those caused by the pandemic and the 2008 financial crisis.In a huge downgrade from its March forecasts, the OBR expects the economy to shrink by 1.4 per cent in 2023 — lowered from an estimate of 1.8 per cent growth — and expand only by a feeble 1.3 per cent in 2024.

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Jeremy Hunt, chancellor, said the OBR had laid out the “stark impact of global headwinds on the UK economy” and that its forecasts showed the government was helping to make the recession shallower, inflation lower and job losses smaller than would otherwise be the case. But George Dibb, head of the Centre for Economic Justice at the think-tank IPPR, said the UK was the only G7 economy that had yet to regain its pre-pandemic size and, despite the chancellor’s promises of growth, “the OBR forecasts show another half decade of economic stagnation ahead”.Soaring prices are by far the biggest factor hitting household incomes in the short term. Although the OBR thinks November’s 11.1 per cent reading for consumer price inflation represents the peak, it expects inflation to remain high into next year, averaging 7.4 per cent in 2023. Based on market expectations of higher interest rates and a sharp fall in gas prices, inflation would then fall rapidly with consumer prices falling outright for a full two years from mid 2024. But, even as price pressures waned, the OBR said households would increasingly feel the effects of frozen tax thresholds, higher mortgage costs and a fall in property prices of some 9 per cent over two years — and would cut their spending sharply as a result.It is predicting a slightly stronger recovery than the Bank of England expects in 2024 chiefly because it is more optimistic about inflation falling fast and because it thinks some people who amassed big savings piles during coronavirus lockdowns will now run them down to protect their living standards — with the saving ratio falling to zero in 2023.

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Even worse than the outlook for household consumption is the OBR’s forecast for business investment, which is already 8 per cent below its pre-pandemic level and expected to fall further in 2023. The OBR said recession, higher interest rates and energy costs, the corporation tax rise and uncertainty over the UK tax regime would all contribute to keep investment 8.8 per cent lower than its March forecast at the start of 2027.Torsten Bell, director of the Resolution Foundation think-tank, called this a “disaster”. “Investment today is our living standards tomorrow,” Bell said. The OBR also said near-term growth in both exports and imports would be lower than it forecast in March because of the weaker growth outlook. Its trade forecast reflected evidence that Brexit had had “a significant adverse impact on UK trade”. Yet despite the deterioration in the outlook for the economy over the next five years, the OBR has not changed its view since March on the UK’s capacity to grow annually in the longer term. This optimism came as the OBR shifted its view on the likely effects of the post-Brexit migration regime, expecting more foreign workers to arrive, boosting the size of the UK workforce and compensating for weak business investment and productivity.

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Do you want to know what your inflation-fighting pay rise will actually be worth to you — once income tax and national insurance have been deducted?If, for example, you think a 10 per cent increase in gross pay is worth 10 per cent in take-home pay, think again.Income tax and national insurance levied in the UK are both progressive — meaning the percentage take goes up the more you earn. So the net salary increase on a 10 per cent boost to gross pay will generally be smaller the more you earn.The difference may not be great — but it will be a disappointment if you are expecting 10 per cent. And, if you are running a tight household budget, it may make a difference, especially if you are trying to save a few pounds a week for a particular purchase.To help you with your sums, FT Money is this week launching an online calculator. Just input your gross salary and the percentage increase you are getting — or hoping for — and the calculator will give you your new net pay.

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You can also use our calculator to work out the net effects of a reduction in pay. For example, to see how much you would be getting if you went down to a four-day week, either by choice or because you were forced to do so by family circumstances or other pressing needs.For most people, the progressive tax system means that a 20 per cent reduction in gross pay will deliver a smaller decline in net pay. As well as a four-day week, you can consider other options, such as a three-day week or taking an extra month’s annual leave — unpaid.

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Of course, just as a pay rise depends on an employer, so do most choices of reducing your working hours. Different companies offer different options, and on varying terms. Some even allow employees to take some extra leave without imposing the full equivalent pay cut in full. Others don’t.Under 2014 legislation, all employees with 26 weeks’ service — not just parents and carers — have the legal right to request flexible working. It’s known as “making a statutory application”. Employers are required by law to deal with requests in a “reasonable manner”. Our calculator is set for UK tax and social security rates. But similar principles apply in most developed countries — progressive fiscal policies mean that tax is levied at a higher percentage on higher incomes than on lower ones. So as your gross pay goes down, so does the marginal tax rate. And vice versa.If you are busy working out your income and budget plans, you might also find it helpful to look at our online personal inflation calculator. Launched earlier this year, as the cost of living crisis was gathering pace, this allows you to input your personal budget, category by category, so you can work out how fast your household prices are rising. This matters because different people spend their money in different ways. Generally, lower-income households are seeing higher-than-average inflation rates right now because they spend more of their money than others on food and energy bills, which have risen particularly strongly. Wealthier people have experienced lower-than-average inflation because they spend more on items such as clothes, which have gone up less in price. But it’s not black and white — rich people owning big, draughty homes with big heating bills will also have seen higher-than-average inflation. More

WASHINGTON (Reuters) – Even under a “generous” analysis of monetary policy the Federal Reserve needs to continue raising interest rates probably by at least another full percentage point, St. Louis Federal Reserve President James Bullard said, arguing that rate hikes so far “have had only limited effects on observed inflation.”Bullard said that despite aggressive actions by the Fed this year the current target policy rate of between 3.75% and 4% remains below the “sufficiently restrictive” level the Fed feels is needed to lower inflation to its 2% target.In a graphic presented for discussion at an economic event in Louisville, Bullard showed that using even “dovish” assumptions, a basic monetary policy rule would require rates to rise to at least around 5%, while stricter assumptions would recommend rates above 7%.That entire range could fall if inflation declines more rapidly than expected, Bullard said, noting that “market expectations are for declining inflation in 2023.”However “caution is warranted,” he said, since the investors and Fed officials “have been predicting declining inflation just around the corner for the past 18 months.”A measure of “core” inflation watched closely by the Fed and used in Bullard’s analysis was running at 5.1% as of September, twice the Fed’s target, leaving Fed officials aligned in favor of further rate hikes even as they discuss the pace and final destination of their policy tightening cycle.”While the policy rate has increased substantially this year, it has not yet reached a level that could be justified as sufficiently restrictive, according to this analysis, even with the generous assumptions,” Bullard said. “To attain a sufficiently restrictive level, the policy rate will need to be increased further.”His prepared remarks did not include his preferred actions at the Fed’s upcoming December meeting, at which officials are expected to raise interest rates by half a percentage point.Bullard’s recommended lower bound for a “restrictive” level of policy is in line with recent comments by his colleagues and also with financial markets the are currently pricing a peak federal funds rate of around 5% next year. More

The drop came as Lula earlier in the day shrugged off market reactions to his proposals and again criticized the spending ceiling, saying the government could not only think about “fiscal responsibility” but also about “social responsibility”.The Brazilian real plunged more than 2% in early spot trading, weakening past 5.50 to the dollar, while interest rate futures jumped and local stock index futures slipped roughly 2%.Lula’s transition team late on Wednesday proposed to lawmakers guidelines for a constitutional amendment that would set a spending cap waiver to secure welfare programs, though without establishing how long the waiver would last.Vice President-elect Geraldo Alckmin, who is coordinating the transition on behalf of Lula, said it would be up to Brazil’s Congress to give a final word on the proposal.Analysts at XP (NASDAQ:XP) Investimentos said in a note that they believed Congress would work on a “much leaner” version of the draft proposed by the transition team. “Growing signs of a deterioration in the current fiscal framework and a significant expansion in spending have been weighing heavily on domestic financial assets,” they said, with local markets on a rollercoaster ride awaiting for more details about Lula’s economic plans.Speaking at the COP27 climate summit in Egypt on Thursday, |Lula shrugged off market reactions, reaffirming his call for a growth target in addition to inflation target and repeating criticism of the constitutional spending cap.”The stock market will fall, the dollar will rise (against the real). Patience. The dollar doesn’t rise and the stock market doesn’t fall because of serious people, but because of those speculating every single day,” he said.Lula has yet to appoint a finance minister. Reuters reported on Wednesday, citing sources, that he was seen favouring leftist former Sao Paulo Mayor Fernando Haddad for the job, though no final decision has yet been made.($1 = 5.4935 reais) More