By David Milliken, Kylie MacLellan and Andy Bruce
LONDON (RockedBuzz via Reuters) – Finance Minister Jeremy Hunt on Wednesday sought to revitalize Britain’s sluggish economy with a mix of childcare and pensions reform to entice people back to work, plus tax breaks on companies to stimulate weak business investment.
Saying the world’s sixth-largest economy was now poised to avoid a recession this year – even if it will continue to contract – Hunt extended aid to households hit hard by rising energy bills and froze a vehicle fuel tax .
“Faced with enormous challenges, I report today on a British economy that is proving the doubters wrong,” said Hunt, faced with mockery by the opposition Labor Party topping opinion polls ahead of the election planned for next year.
“We made tough decisions in the fall to provide stability and sound money,” said Hunt, who was rushed to the Treasury last October to roll back plans for tax cuts that wreaked havoc in financial markets during his short-lived premiership. by Liz Truss.
“The International Monetary Fund says our approach means the UK economy is on track.”
Labor leader Keir Starmer accused Hunt of “dressing up stagnation as stability” and said Britain “is on a path of controlled decline”.
After the shocks of Brexit, the heavy hit of COVID-19 and double-digit inflation, Britain is the only Group of Seven economy that has not yet recovered to its pre-pandemic size, having suffered a decade almost stagnant income growth.
Hunt and Prime Minister Rishi Sunak have resisted calls by some lawmakers in their Conservative Party for big tax cuts now to ease the heaviest tax burden on the economy since World War II.
But they found the money to extend household energy subsidies by three months and freeze the fuel tax for another year.
Despite that help and lower-than-previously expected inflation, living standards remain on track for a record decline in the two years to the end of March 2024.
In an effort to accelerate growth, Hunt has expanded free childcare to children under two in England as a way to get more parents of young children into work. Campaigners said the £4 billion ($4.8 billion) in annual funding would not meet demand.
Other measures to increase the size of the workforce included ending penalties for people exceeding thresholds on pension contributions, an attempt to keep more seniors in their workplace, and changes to welfare to encourage disabled people to work.
Independent forecasters from the Office for Budget Responsibility (OBR) said it was difficult to judge the impact of Hunt’s attempts to get more workers into the job market and warned that the share of people working or looking for it is set to reach the 23 -year minimum next year before moving up.
Hunt also announced a new three-year corporate investment incentive that will allow companies to offset 100% of their capital expenditures against profits, although this represented a scaling back of tax breaks under a previous regime.
The OBR said the change won’t dull all the pain for companies, as a corporate tax rate hike next month will put the heaviest burden on businesses since the levy was introduced in 1965.
Paul Johnson, director of the nonpartisan Institute for Tax Studies, said the incentives would cause more volatility for businesses.
“Today’s announcement is just the latest in a long line of changes and temporary changes,” Johnson said. “There is no stability, no certainty and no sense of a larger plan.”
Other budgetary measures included increased investment in nuclear power and a new training program for workers over the age of 50.
Hunt said the government would add £11bn to the defense budget – which has been stretched by Britain’s support for Ukraine in its war with Russia – over the next five years.
RECESSION AVOIDED, ONLY
A new set of economic forecasts showed that gross domestic product is expected to shrink by 0.2% in 2023 instead of the 1.4% expected by the OBR in November.
GRAPH – UK budget deficit
GRAPH-Projections of real GDP growth
Since then, energy costs – which have soared since Russia’s invasion of Ukraine – have declined and there have been signs of recovery in some economic data.
“Today the Office for Budget Responsibility predicted that due to changing international factors and the measures I will take, the UK will not enter a technical recession this year,” Hunt said.
The OBR expects economic output to grow 1.8% in 2024 and 2.5% in 2025, it said, up from its previous growth forecasts of 1.3% and 2.6%, respectively.
He cut his forecast for inflation this year to 6.1% from 7.4% in November and said it would stay below 1% for the next three years.
Many economists said Hunt likely wants to hold back some fiscal firepower as he approaches the next national election.
But Wednesday’s forecast showed limits for the future.
Hunt’s aim of bringing down Britain’s public debt – currently at around £2.5 trillion – as a share of GDP over five years had to be met with a buffer of just £6.5 billion.
The OBR said it was the narrowest margin for any finance minister since George Osborne set up the tax watchdog in 2010.
($1 = 0.8304 pounds)
(Additional reporting by UK office; Writing by William Schomberg; Graphics by Vincent Flasseur; Editing by Catherine Evans)
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