Six months after the storm that shook public finances in the United Kingdom, British Finance Minister Jeremy Hunt presented a budget on Wednesday under the sign of a return to normal. The vicious circle of rising interest rates has been broken, the economic outlook is less unfavorable than expected, and lower gas prices mean that state intervention in energy prices costs less expensive than expected. “The declinists are mistaken about our country”, proclaimed the Chancellor of the Exchequer, for whom “growth is a priority for this budget”.
According to him, the United Kingdom will escape recession this year, even if the country should record the weakest growth of the G7 countries, according to IMF forecasts. The objective of halving inflation by the end of the year will be achieved, he promises.
This relative improvement in the economic outlook has made it possible to free up 30 billion pounds of leeway in the British budget. Jeremy Hunt made the choice to spend about two-thirds of it.
Increases in public spending
While he was under pressure from the right wing of the Conservative Party to lower taxes, and in particular to cancel the increase in corporate tax, the minister instead favored an increase in public spending. With the priority of improving the employment rate, which is lower than before the pandemic, and of restoring business investment, which has been at half mast since Brexit.
The budget thus provides for an increase in the tax exemption for pension contributions, in order to encourage seniors to remain in employment longer, as well as a reform of aid for the disabled and a boost in the care of young children. To boost investment, companies will be able to tax deduct the amount of their depreciation, a measure estimated at 9 billion pounds per year.
Added to this is an extension of 2 to 3 billion pounds on the defense budget and an extension of energy aid, in particular the ceiling applied to household bills, the cost of which is estimated at 4 billion pounds. Finally, this budget extends the fuel tax freeze for another 12 months. “We will not stop until we are the most dynamic economy in Europe”, launched Jeremy Hunt in front of the leader of the opposition, Keir Starmer, who described these measures as “band-aid”. “It’s major surgery that our economy needs,” said the Labor leader.
No revaluation for the public sector
If the British government has decided to come to the aid of motorists, it has not yielded to the demands of public sector employees, who want more generous salary increases. By coincidence, Jeremy Hunt’s speech in parliament took place on the very day of a massive strike among teachers, railway workers, metro drivers, doctors and other civil servants.
“There is no additional funding to improve the pay of public sector employees, whereas £6 billion would have been enough for an adjustment in line with inflation. It is a political choice,” observes the Institute for Fiscal Studies (IFS), in a note.
Unless the government waits for a further drop in inflation to concede a boost to civil servants. But its financial margins will be limited. In its analysis, the Office for Budget Responsibility (OBR), the government’s budget watchdog, estimated that Jeremy Hunt would meet his financial objectives, but “with the lowest room for maneuver since 2010.”