Hunt Says UK Is in Recession as Ukraine War, Inflation Bite

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(Bloomberg) — Jeremy Hunt said the UK is already in recession, announcing cuts to growth forecasts as Russia’s war in Ukraine stokes inflation at a 41-year high.

The British economy is forecast to shrink by 1.4% next year, a downgrade from the previous official outlook for 1.8% growth, the Chancellor of the Exchequer told the House of Commons in his Autumn Statement on Thursday. He also lowered the prediction for 2024, blaming “global headwinds.”

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The outlook lays the ground for a huge package of tax rises and spending cuts that Prime Minister Rishi Sunak’s government is pushing through to plug a yawning budget gap and restore confidence among investors after a disastrous experiment with deep tax cuts. The aim is to get debt falling as a share of the economy by 2027-28, a goal that may require about £55 billion of savings from the budget. 

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“We take difficult decisions to tackle inflation and keep mortgage rates down,” Hunt told lawmakers. “But our plan also leads to a shallower downturn; lower energy bills; higher long-term growth; and a stronger NHS and education system.”

Hunt has described the decisions he’s announcing as “eye-watering” in their scale. The task is enormous, patching up the economic damage wrought by the Covid-19 pandemic, the fallout from Russia’s war in Ukraine, and the disastrous tenure of Sunak’s predecessor, Liz Truss and her Chancellor, Kwasi Kwarteng, whose massive program of unfunded tax cuts sank the pound and roiled the bond markets. 

Hunt — brought in by Truss to replace Kwarteng and steady market nerves, and kept on by Sunak — had already reversed the bulk of that plan before Thursday. He’s targeting aid toward the most vulnerable people hit hardest by a record squeeze on living standards.

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In the run-up to the budget, the chancellor and his team have laid the ground to freeze some income tax thresholds, increase a windfall tax on oil and gas profits and raise more cash from capital gains tax and levies on shareholders.

The stakes are high: the ruling Conservatives trail Labour by about 20 points in the polls with just over two years at most until the next general election. 

Hunt is expected to achieve the savings he’s after with a 60-40 split between spending cuts and tax rises, but the balance will be key. Public services have already been pared back for a decade under Tory austerity, and voters have little appetite for more. 

Meanwhile, tax rises are anathema to Conservative philosophy, and Sunak’s defeat to Truss in this summer’s leadership contest was in a large part due to his record as Chancellor in putting the country on track to its highest tax burden in seven decades.