On the day that he delivered his first Budget, Chancellor Jeremy Hunt insisted the UK economy was “on the right track” as he used an improvement in the public finances to offer tax breaks to businesses and wealthy pensioners.
Mr Hunt’s claims came as the Office for Budget Responsibility (OBR) projected the economy would shrink by less than expected and inflation would fall more sharply than previous forecasts.
But his economic package did not mask the fact that real household disposable income, a measure of real living standards, is expected to plummet by a cumulative 5.7 per cent over the 2022/23 and 2023/24 financial years, representing the worst decline since records began.
Based on the forecasts published on Wednesday, living standards won’t return to pre-pandemic levels until 2028 and the tax burden remains on course to be the highest since the Second World War.
The changes to pension limits will cost the Treasury more than £1.1 billion year by 2027/28, but the independent Institute for Fiscal Studies (IFS) said it would have only a limited impact on employment.
IFS director Paul Johnson said the measures would “encourage a relatively small number of better-off workers to stay in the workforce a bit longer” while Labour leader Sir Keir Starmer branded it a “permanent tax cut … for the richest 1 per cent”.
Mr Hunt’s Budget was pitched as being awash with investment, akin to £21 billion a year, with the Chancellor telling MPs the British economy was “proving the doubters wrong”.
He said: “In the autumn we took difficult decisions to deliver stability and sound money. Since mid-October, ten-year gilt rates have fallen, debt servicing costs are down, mortgage rates are lower and inflation has peaked.
“The International Monetary Fund says our approach means the UK economy is on the right track. Today the Office for Budget Responsibility forecast that because of changing international factors and the measures I take, the UK will not now enter a technical recession this year.
“They forecast we will meet the Prime Minister’s priorities to halve inflation, reduce debt and get the economy growing. We are following the plan and the plan is working. But that’s not all we’ve done.”
The Chancellor also used his Budget to confirm free childcare support would be widened south of the Border, sparking a call for Scottish ministers to follow suit, as well as extending household energy assistance.
There were also benefit changes to encourage those on long-term sick leave back to work and investment incentives for businesses. Some £63 million of money was earmarked to help leisure centres with swimming pools meet energy costs and become more efficient following fears crippling heating costs could force some to close.
Fuel duty was frozen and a 5p cut to the rate will continue for a further 12 months, with the Chancellor predicting a saving of £100 next year for motorists.
Mr Hunt also claimed the UK could take advantage of tax flexibility since leaving the European Union, with a “Brexit pubs guarantee” seeing duty on draught products up to 11p lower than in supermarkets.
As widely reported, the Chancellor said the £40,000 cap on tax-free annual pensions contributions would rise to £60,000. The change will come alongside a decision to scrap the lifetime allowance (LTA) on pension savings, a fiscal policy previously labelled the “doctors’ pension tax” by the British Medical Association.
It had been due to stand at £1.07 million until 2026, but Mr Hunt said removing the threshold would simplify the tax system and “incentivise our most experienced and productive workers to stay in work for longer”.
The Chancellor claimed decisions taken by the UK Government meant the economy was in better shape, meaning there would be more money available in future.
“We are meeting the debt priority,” he said. “And with a buffer of £6.5bn, it means we are meeting our fiscal rule to have debt falling as a percentage of GDP by the fifth year of the forecast. As a proportion of GDP, our debt remains lower than the USA, Canada, France, Italy and Japan.
“And because of the decisions I take today, and the improved outlook for the public finances, underlying debt in five years’ time is now forecast to be nearly three percentage points lower than it was in the autumn. That means more money for our public services and a lower burden on future generations – deeply-held Conservative values which we put into practice today.”
There was also more money for Scotland due to “new investment zones”, which he labelled “12 potential Canary Wharfs”.
He said: “For Scotland, Wales and Northern Ireland, this Budget delivers not only a new investment zone, but an additional £320 million for the Scottish Government, £180m for the Welsh Government and £130m for the Northern Ireland Executive as a result of Barnett consequentials.
“On top of which in Scotland, I can announce up to £8.6m of targeted funding for the Edinburgh Festivals as well as £1.5 million funding to repair the Cloddach Bridge [near Elgin]."
There was also action on energy, with the Chancellor confirming the UK Government’s energy price guarantee, which caps average household bills at £2,500, would be extended at its current level from April to June. Nuclear energy was also classed as “environmentally sustainable”, making it easier and cheaper to produce.
The Chancellor announced the “biggest change to our welfare system in a decade”, with reforms promising to encourage more disabled people into work, and the abolition of the Work Capability Assessment, allowing disabled benefit claimants to seek work without fear of losing financial support.
Sir Keir claimed Britain was the “sick man of Europe once again” and the Budget showed the “expiry date looms ever closer” for the Conservatives.
The Labour leader said years of Tory-led governments have led to a “doom loop of lower growth, higher taxes and broken public services” and put the country on a “path of managed decline”.
He criticised Mr Hunt for “dressing up stagnation as stability”, adding of the public: “They deserve better than another cheap trick from the Government of gimmicks, making them pay whilst trying to claim the credit.”
Rising to respond to Mr Hunt’s hour-long financial statement, Sir Keir mocked the Government over recent salad shortages in supermarkets and environment secretary Therese Coffey’s suggestion of a greater reliance on turnips to avoid such a situation.
He told the House of Commons: “[Mr Hunt’s] opening boast was that things aren’t quite as bad now as they were in October last year after the kamikaze budget, and the more that he pretends everything is fine, the more he shows just how out of touch they are.
“After 13 years of his Government, our economy needed major surgery, but like millions across our country, this Budget leaves us stuck in the waiting room with only a sticking plaster to hand. A country set on a path of managed decline, falling behind our competitors, the sick man of Europe once again.
“This was a day for ambition, for bringing us together with purpose and intent, for unlocking the pride that is in every community, matching their belief in the possibilities of the future. But after today we know the Tory cupboard is as bare as the salad aisle in our supermarket.”
SNP economy spokesperson Stewart Hosie accused the UK Government of making the UK economy “one of the weakest” in the G7. He told the Commons: “Being outside the EU single market remains a drag on the ability of firms to trade easily with our nearest neighbours.
“What the Chancellor actually described though was a UK economy which has gone from the most robust in the G7, to one of the weakest, a UK economy where Brexit slammed the brake on UK investment, a UK whose performance deteriorated after the Brexit referendum both in absolute and relative terms.
“A country which unilaterally imposed trade barriers with its nearest neighbours and a country, the only one in the G7 where the economy has not returned to its pre-pandemic level.”
Mr Hosie said the Budget needed to “begin to address more of the long-term issues the economy faces and action to tackle some of cost burdens on ordinary people”.
Turning to the UK Government’s support for nuclear power, he said: “Here’s the rub when they call it green or renewable. Allowing one or two generations to buy expensive, overpriced nuclear energy, nuclear electricity and then forcing the next 50 generations to decommission, store and guard toxic nuclear waste is not green.”