The UK economy offers the Conservatives few options as a tough election looms

Tradition dictates that the President of the United Kingdom must be allowed to drink alcohol when presenting the government's annual tax and expenditure budget, while only alcohol is allowed in Parliament. Chancellor of the Exchequer Jeremy Hunt declined to raise a glass last week, which is fitting given the subdued nature of the economic measures he is expected to unveil ahead of the upcoming election.

American voters aren't the only ones going to vote. Britons will also get a chance to elect their own leaders. The UK budget comes in the same week that President Joe Biden effectively launched his re-election campaign with a State of the Union address. Both administrations have a challenge to juggle politics and economics.

The lack of boldness in the UK's budget announcement suggests the economy is stabilizing itself. The UK entered a technical recession at the end of last year, inflation remains stubbornly at 4% and interest rate cuts remain in place. According to Bank of England Chief Economist Huw Bill, there are a few options.

The government faced a dilemma ahead of the budget, balancing fiscal prudence with the desire to give voters an economic sweetener.

Hunt sought to reduce control over national insurance—a tax on workers' wages—paid by a new tax on vaping and an extension of a windfall tax on oil and gas companies' profits. If the higher the price, the more electorate it is, the income tax cut is stopped. Tax cuts may not satisfy voters – the ruling Conservatives are still trailing in the polls, despite earlier cuts to national insurance policy in November.

„Opportunistic tax cuts will not put the UK economy on a better growth path,” says DS Lombard economist Constantinos Venidis. „These will ultimately hurt future public investment and therefore do little to boost long-term growth.”

In September 2022, Hunt's predecessor, Kwasi Kwarteng, unveiled 45 billion pounds ($57.3 billion) in unfunded tax cuts. It was a disaster and spooked world markets; The pound hit a record high of $1.03 against the dollar, UK government bonds rose, and the BOE had to intervene. Hunting should be done carefully.

In the government's ideal world, lower inflation and earlier and more aggressive rate cuts would lower future borrowing costs and give Hunt and Prime Minister Rishi Sunak more fiscal intervention for an allowance to boost household finances.

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But there has been no mercy over the past few months, and the UK has a tough rule to cut government debt as a percentage of GDP by the end of the five-year forecast.

However, the Office for Budget Responsibility, or OBR, the country's financial regulator, delivered better news: inflation falling to the BOE's 2% target in the second quarter of 2024, a bold forecast. The Federal Reserve, like other central banks around the world, would be happy with such a decision.

The OBR is more optimistic about the UK economy than it was in November, expecting GDP to rise by 0.8% this year and 1.9% in 2025, up from its previous forecast of 0.7% and 1.4% respectively.

Hunt said the UK „will soon turn the corner on growth”. While predictions suggest he may be right, it does so from a low base. GDP at the end of 2023 was 1% higher than at the pre-pandemic end of 2019. That's worse than every group of seven countries except Germany, which grew by just 0.1% over the period.

The United States grew 8.2% during that time, according to the Organization for Economic Co-operation and Development, giving Biden a much stronger economic record than Chung in the UK.

Write to Callum Keown at [email protected]

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