Jeremy Hunt warned against ‘excessive austerity’ as markets await autumn statement – business live | Business

These charts show the UK’s poor economic situation, with inflation at a 41-year high and a recession possible underway – and government departments bearing the scars of the last austerity drive.

My colleague Richard Partington’s full analysis is here:

Frances O’Grady, general secretary of the Trades Union Congress (TUC), warned against the dangers of austerity.

Speaking on BBC Radio 4’s Today programme ahead of the Chancellor’s autumn statement, she said that tough spending cuts are “never easy for working people”.

O’Grady said that George Osborne’s austerity plan had “failed”, so it would be a mistake for Jeremy Hunt to make similarly painful cuts.

“We have been suffering weak growth as a country ever since, because it was killing the golden goose.

“If you are starving the NHS, our education and skills system, of funding that has an impact on the economy because we need a healthy workforce, we need educated, skilled and trained workers.

“Now we really need big investment in green infrastructure and our public services, if we’re going to grow.”

It’s an understatement to say that Jeremy Hunt faces a difficult balancing act today, says Investec economist Phil Shaw.

Politics and economics are pulling in fundamentally different directions: the evident need to assist in light of the cost-of-living crisis, which underpins much of the current wave of industrial action, collides with the hard truth that markets need to see the public finances being kept on a sustainable footing.

As the Truss administration found out, the latter is neither negotiable nor easily kicked into the long grass: credibility must be shored up, to avoid a return of the volatility in markets and surges in yields that can worsen conditions for the whole economy in a short space of time.

Fresh austerity will be a “significant drag on economic activity”, Shaw points out, which will push the UK economy into recession through next year.

But, it would also mean the Bank of England wouldn’t need to raise interest rates as high as expected.

The Treasury have released a video to set the scene for the autumn statement, involving several cabinet members.

To the backdrop of a menacing drum roll, chancellor Jeremy Hunt said:

“Today we are having to take some difficult decisions to restore stability, bring inflation down and balance the nation’s books.

“So this is our plan to build a stronger economy, protect public services and make sure we look after our most vulnerable.”

The plan will include support for the most vulnerable with their rising energy costs, says business secretary Grant Shapps, and “asking energy companies to pay their fair share” (that could be a windfall tax on electricity producers).

Education secretary Gillian Keegan said investment would focus on “skills and ensuring the British people have access to greater opportunities”.

While health secretary Steve Barclay said it would “deliver on our promise of a stronger NHS and tackling the Covid backlogs”. Yesterday, Barclay hinted that the autumn statement will involve giving more money to the NHS.

Home secretary Suella Braverman said the Government would “make our streets safer, support our security services and control migration”. (although her £63m deal with France to reduce the number of people trying to cross the Channel in small boats has been condemned by unions, refugee groups, and some Conservative MPs).

And prime minister Rishi Sunak echoes the point about restoring stability, saying:

“Today’s statement will help deliver the long-term stability this country needs.”

The most famous quote about bonds comes from Bill Clinton’s chief strategist James Carville.

Carville joked that if he was reincarnated, he’d like to come back as the bond market, rather than the president, the pope or a baseball star, because then “you can intimidate everybody.”

Kwasi Kwarteng and Liz Truss can confirm this – they lost their grip on Downing Street after the bond market flexed its muscles, sending UK borrrowing costs soaring.

But Jeremy Hunt risks worsening the recession by slashing spending and hiking taxes in a bid to placate the bond vigilantes in the city.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says:

The UK government’s Autumn Statement will mark a complete about turn from the Truss administration’s plans for a sugar rush boost to growth through tax cuts which sparked mayhem on bond markets and saw the UK’s risk premium shoot up. Gilt yields have come down significantly since the September scare which threatened to destabilise the UK financial system, and the Sunak administration is desperate to hold onto credibility.

By taking all these steps the government hopes to fill in the fiscal ‘black hole’ which has emerged because successive Conservative ministers have said they want to see net debt falling by 2025-2026. Sunak and Hunt are trying to dance to a tune they think the bond markets are playing, but by keeping so strictly to their perceived rules, they risk playing it too safe, and pushing the prospects of economic recovery far into the distance. ‘’

Economists predict that the Office for Budget Responsibility will paint a very bleak economic picture in their forecasts today.

Sanjay Raja, senior economist at Deutsche Bank, says:

Expect a deep and protracted recession in 2023 with growth likely to remain subdued until 2025 at the earliest. Inflation projections will also be increased significantly, with more persistence baked into the OBR’s projections.

And in terms of the labour market, we expect the OBR to forecast a slow labour force recovery, with the unemployment rate pushing to around 5.5% to 6% over the next two to three years.

All up, the challenging economic outlook will likely underscore the main reason for the size of the fiscal hole, with our borrowing projections pushing a little above £90bn in 2026/27 [compared with £32bn after the Spring Statement].

Torsten Bell, chief executive of the Resolution Foundation think tank, also expects some “pretty bad economic news”.

Bell told Sky News the UK faced a “grim economic outlook”, with the economy growing very slowly and “possibly ending this Parliament as weak as it began”.

He added that this would be “much weaker than we were previously expecting”, and also predicted that unemployment will rise.

Millions of UK households will pay more for their energy from next April under plans to cut the generosity of the government’s gas and electricity support scheme expected to be announced by Jeremy Hunt on Thursday.

The chancellor is likely to use his autumn statement to say the need to save money and reduce state borrowing will require the household energy price cap to rise from £2,500 to an expected £3,000 to £3,100.

Hunt will also announce higher windfall taxes on oil, gas and electricity firms that have seen their profits rocket after Russia’s invasion of Ukraine in February sent global energy prices soaring.

Despite the fragile state of the economy, the chancellor will say he needs to suck up to £60bn out of the economy through tax increases and spending cuts to help the Bank of England bear down on inflation.

He is expected to lower the threshold at which people start paying the 45p top rate of income tax from £150,000 to £125,000, in a substantial change of direction from the later-abandoned move to abolish the rate under Liz Truss’s government.

There are expected to be increases in capital gains tax and dividend tax, while personal tax thresholds are also likely to be frozen for a further two years from 2025-26. Council tax could also increase, as the rule limiting councils to 3% rises unless they have a referendum could be raised to 5%.

There are concerns that Hunt could take Britain back into an era of austerity that will add to the woes facing consumers and households, says Victoria Scholar, head of investment at interactive investor.

However the Treasury has two main goals – firstly to outline a fiscal plan that compliments the monetary plan of the Bank of England in terms of its combat against inflation. He needs a strategy that helps to tame inflation, rather than focusing on growth, which was the mistake of his predecessor Kwasi Kwarteng.

The second aim is to reassure the electorate that this is a government of economic credibility, sound money and fiscal competence and to erase the reputational damage brought about by the disastrous mini-budget in September by showing that the Treasury can balance the books by reducing spending and raising taxes.

Fiscal drag looks set to be a big theme this Autumn Statement, Scholar adds. That’s the trick where the chancellor freezes the levels at which people pay higher tax rates.

With upward pressures on prices and wages, the government can raise extra taxes by freezing thresholds on levies such as income tax, inheritance tax and VAT.

This will drag millions more people into higher tax brackets, earnings the Treasury more in terms of tax receipts in a way that is more optically palatable then announcing big swathes of tax increases at a time when the cost of everything from energy to food to mortgages is on the rise.

Hunt could also be laying a political trap for Labour, if he times many of today’s cuts to land after the general election (due by 2024).

Mohamed El-Erian told the Today Programme:

If you take the politics out of it, you do not need a £50bn fiscal effort today.

Instead, you could do £20bn or £30bn of fiscal tightening today, mostly on the tax side with some spending cuts, and do it in a way that protects the most vulnerable, El-Erian argues.

If however, you decide to go for £50bn and phase the measures until after the election, then clearly there is a political element to this economic approach.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Nearly two months after the turmoil triggered by the mini-budget, chancellor Jeremy Hunt will announce a swathe of tax rises and spending cuts to reassure the markets that the UK is in responsible hands.

Today’s autumn statement is expected to outline plans to cut public spending by around £30bn, along with £24bn of extra taxes.

But many of the tough decisions may be deferred until after the election – creating a political headache for Labour.

Hunt’s also expected to increase benefits, pensions and tax credits by inflation – meaning a 10% rise next April.

But support for energy bills will be trimmed; the average annual bill could rise to £3,000 in the spring, from the current £2,500 cap, alongside a windfall tax on energy generators.

So, having reversed many of the measures in the mini-budget, Hunt is set to take the UK on a completely different path to Kwasi Kwarteng.

But will the markets prefer Austerity 2.0, rather than the unfunded fiscal easing of Trussonomics that sank the pound and drove up borrowing costs?

Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser at Allianz, says that Hunt faces a very tricky balancing act.

He told Radio 4’s Today Programme that the markets will be looking for confirmation that the UK is restoring its economic reputation, and putting its finances on a sound footing. But, investors also care about growth.

El-Erian said:

They will also be looking for measures to promote economic growth.

It is going to be very tricky, striking the right balance, as there are so many economic and political judgements here.

And he agreed that Hunt risks going too far the other way, if he simply announces huge tax rises and spending cuts.

El-Erian warned:

It could be seen as excessive austerity.

At the end of the day, the answer to all the issues that the UK faces today, from inflation to low growth to a damaged economic reputation is high, sustained, inclusive growth.

It is “absolutely critical” that the government delivers a set of measures to enhance productivity and promote high economic growth, he added.

Yesterday, the Bank of England warned that Britain is suffering a worse economic performance than its rivals because of Brexit and a stark drop in the size of the workforce since the Covid pandemic.

Andrew Bailey also told MPs that the UK’s international reputation has been damaged by September’s mini-budget.

El-Erian agrees that the UK certainly has a credibility issue.

But the bigger question is how large the fiscal black hole actually is – and about the size of Hunt’s fiscal measure, the timing, and the balance between spending and tax cuts.

He says:

There is a concern that there may be a political agenda being played as well as an economic agenda.

The agenda

• 9.30am GMT: ONS weekly economic activity and business insights

• 9.30am GMT: ONS report into UK GDP, by regions and countries: January to March 2022

• 10am GMT: Eurozone inflation reading for October

• Late morning: Jeremy Hunt to give autumn statement

• 1.30pm GMT: US weekly jobless claims

• 1.30pm GMT: US building permits data