After the fiscal hara-kiri course of short-term Prime Minister Truss, her successor Sunak is taking a radical turn. Instead of tax cuts, his finance minister promises rising taxes and spending cuts. Sunak is also sending conciliatory signals to Brussels.
The British government has announced the biggest tax increases and spending cuts in a decade. The country’s economy is in recession, Finance Minister Jeremy Hunt said in London as he published his austerity budget in Parliament. By means of tax increases and spending cuts, 55 billion pounds (65 billion euros) are to be saved over the next five years. The painful measures are necessary to ensure financial stability after the recent turmoil, Hunt said. The U.K. has thus become the first major Western economy to drastically cut spending following the pandemic and recent energy subsidies.
Among other things, Hunt announced he will raise taxes by freezing the thresholds for higher rates, which will move thousands of people up into the top tax bracket as their pay rises through wage increases and inflation. The government will also cut an energy subsidy for households next spring. It will also increase the profit tax on energy company profits. “Because of our plans, the recession is shallower and inflation is lower,” Hunt said in presenting the plan to the U.K. Parliament. “But it means we have to make difficult choices,” he added.
The measures mark a sharp shift in U.K. economic policy after former British Prime Minister Liz Truss spooked financial markets with a promise to boost growth through tax cuts financed by increased borrowing. Her successor, Rishi Sunak, is now steering economic policy in the other direction and trying to convince investors that the U.K. is serious about finally getting its rising national debt under control. His task will be to regain the confidence of the markets without causing major damage to the economy, which is widely expected to fall into recession.
Sunak wants to settle Northern Ireland dispute with EU
Sunak could create further confidence by defusing the dispute with the EU over Northern Ireland. He announced in the House of Commons that a solution to this issue would be found soon. The Conservative politician said in the House of Commons in London that he had had a very constructive exchange with EU Commission President Ursula von der Leyen and with European heads of government on this issue.
The protocol is part of the Brexit agreement concluded at the end of 2019 and is intended to ensure that no border controls will be necessary between Northern Ireland and the EU member Republic of Ireland despite the British exit from the EU. This is intended to prevent parts of the mainly Catholic supporters of a union with Ireland from taking up arms again. Instead, however, a goods border has now been created between Northern Ireland and the rest of the United Kingdom, which is met with rejection by many of the mostly Protestant proponents of union with Great Britain.