Jeremy Hunt has announced his autumn budget plans as well as the news that the UK has officially gone into a recession.

Jeremy Hunt has announced his autumn budget plans as well as the news that the UK has officially gone into a recession. The Office of Budget Responsibility released a report - Overview of the November 2022 Economic and fiscal outlook - this morning. The key points are:

• Rising energy, food, and other goods prices have pushed up the interest rates set by inflation-targeting central banks to levels not seen since the 2008 financial crisis, taking the wind out of the global recovery from the pandemic.
• CPI inflation is set to peak at a 40-year high of 11 percent in the current quarter, and the peak would have been a further 2½ percentage points higher without the energy price guarantee (EPG) limiting a typical household’s annualised energy bill to £2,500 this winter and £3,000 next winter. 
• Rising prices erode real wages and reduce living standards by 7 percent in total over the two financial years to 2023-24. 
• The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022, with a peak-to-trough fall in GDP of 2 percent. 
• Unemployment rises by 505,000 from 3.5 per cent to peak at 4.9 per cent in the third quarter of 2024.

Hunt’s Budget: “Three priorities for growth: energy security, investment in infrastructure, and a plan to turn the UK into the world’s next Silicon Valley.” Speaking to the House of Commons today, here is what was laid out:

Tax:

• “Ask more from those who have more” - the 45p income rate tax threshold will fall from £150,000 to £125,140. This means those earning over £150,000 will pay just over £1,200 more a year.
• Electric vehicles will no longer be exempt from Vehicle Excise Duty from April 2025.
• Increasing the Energy Profits Levy from 25% to 35% from January 1st to March 2028.
• Imposing a 45% levy on electricity generators to raise an estimated £14 billion next year.

Energy and cost of living crisis:

• The energy price guarantee scheme will increase from £2,500 for the average household to £3,000 for 12 months from April.
• Introducing additional cost-of-living payments for the “most vulnerable” with £900 for those on means tested benefits, £300 for pensioners and £150 for those on a disability benefit.
• Additional £1 billion for a further 12 month extension to the household support fund.
• Spending an extra £150 billion on energy, blaming Putin’s “weaponization” of international gas prices as a driver of the cost of national energy consumption increases.
• Doubling the amount of support from £100 to £200 for households that use alternative fuels such as LPG which will be delivered “as soon as possible.”
• New targeted approach to help businesses to be announced in the coming months.
• Announced plans for a new nuclear power plant, creating 10,000 jobs.

Welfare and Benefits:

• Increasing the NHS Budget in each of the next two years by an extra £3.3 billion.
• An increase in funding for the social care sector of up to £2.8 billion next year and £4.7 billion the following year.
• The Treasury will increase working age and disability benefits in line with inflation by 10.1%.
• Protection of the pensions triple lock confirmed and increasing the pension credit by 10.1%.
• He accepted a recommendation to increase the national living wage by 9.7%, making the hourly rate £10.42 from April 2023.
• Investing an extra £2.3 billion per year in British schools for the next two years.
• Rejected calls to put VAT on independent school fees, arguing it’s “giving with one hand and taking away with the other”.
• Capping the increase in social rents at a maximum of 7% in 2023/24, saving for the average tenant £200 next year.
• The stamp duty cuts announced in Kwasi Kwarteng’s mini-budget will remain in place until March 31 2025.
• Hunt added, “After that, I will sunset the measure, creating an incentive to support the housing market and all the jobs associated with it by boosting transactions during the period the economy most needs it.”

Defence and aid:

• Maintaining the defence budget at at least 2% of GDP, recognising the “need to increase defence spending” but saying that it is “necessary to revise and update the Integrated Review, written as it was before the Ukraine invasion.”
• Overseas aid to remain around 0.5%.

Business, Growth and Innovation:

• On innovation, Hunt said he wants to “combine our technology and science brilliance with our formidable financial services to turn Britain into the world’s next Silicon Valley.”
• Using “Brexit freedoms”, the government will decide and announce changes to EU regulations in 5 growth industries (digital, life sciences, green industries, financial services and advanced manufacturing).
• He said the most important driver of global success is “not tax subsidies, but global competition”, so the government will legislate to give the digital market unit new powers to challenge monopolies and increase the competitive pressure to innovate.
• Removing import tariffs on over 100 goods used by UK businesses, such as car seat parts and bicycle frames. 
• Protecting the Research and Development budget, increasing funding to £20 billion in 2024/2025 as part of the government’s “mission to make the UK a science superpower.”

Hunt said it was because the Conservatives took “difficult decisions in 2010” (likely referring to austerity measures) that the government was able to afford a “record budget for the NHS”, the furlough scheme, and now the energy price guarantee.

Opposition Reaction

Shadow finance minister Rachel Reeves said the Chancellor has offered more of the same, saying what the country got today is “an invoice for the economic carnage that this government created. Never again can the Conservatives be seen as the party of economic competence.” She added it was clear that they wanted to blame global factors, pretend the mini-budget was nothing to do with them, and set traps for the Labour party.

“It’s about the fact that when the global storm hits, we are uniquely exposed because of the choices the Conservatives have made.”

Britain’s problems, she said, started before the pandemic and Russia’s invasion of Ukraine. “The UK has grown by an average of 1.4% a year under the Conservatives, we are the only G7 economy that is still poorer than before the pandemic.”

Market Reaction

The pound dropped slightly after the Budget plans were announced, falling to the $1.183 mark - down about 0.6% - and continued to fall to $1.180 (down almost 0.9%) by 12.45pm.

At 12.15pm, the FTSE 100 was down 0.65%, the FTSE 200 down by almost 0.3%.

With the announcement of the increase in the energy profits tax levy, Shell’s shares were down 0.45% and BP’s fell by 0.65%. As the windfall tax will also be imposed on electricity generators, the SSE dropped 3.5%, Orsted was down 2.2%, the National Grid was down 0.5% and Drax down by 3.%

(Sources: ITV, The Independent, OBR, Sky News)