UK finance minister Jeremy Hunt will bury Britain's failed "Trussonomics" experiment on Thursday by cutting spending and raising taxes, moves that he and prime minister Rishi Sunak say are needed to restore investor confidence.
Britain is probably already in a recession with 11 per cent inflation creating a cost-of-living crisis. It is the only Group of Seven nation yet to recover its pre-pandemic size having previously suffered a decade of near-stagnant income growth.
But Hunt has warned of more pain in his budget statement that will represent an abrupt reversal of policy from the unfunded tax cuts promised by former prime minister Liz Truss.
Her government's short-lived "mini-budget" on September 23rd sent the pound to an all-time low against the US dollar, threatened chaos in the housing market and forced Truss to quit after just 50 days in Downing Street.
Investors took comfort when Hunt was appointed in mid-October to steer the economy back toward a more orthodox path.
He and Sunak say they must now go further.
"Stability has returned to the United Kingdom but that's because the expectation is that the government will make those difficult but necessary decisions," Sunak said this week.
Critics say a return to austerity is unnecessary, will hurt millions of households and will deepen the expected recession.
News reports said the plan – due to be announced about 11.30am – was expected to include inflation-linked rises in welfare and pensions after worries about smaller increases.
There would also probably be help for the poorest households to pay their energy bills when an existing cap expires and is replaced with a less-generous one in April, the reports said.
But Hunt says he can only slow the rise in borrowing costs if he can show investors that Britain's $2.45 trillion (€2.91 trillion) debt mountain will start to fall as a share of economic output. Beating inflation is key to that.
"The Bank of England has my wholehearted support in its mission to defeat inflation... but we need fiscal and monetary policy to work together," Hunt said in excerpts of his speech.
Tax rises and spending cuts
Britain's government is aiming for more than 50 billion pounds of annual savings by five years' time – equivalent to about 2 per cent of annual economic output. How soon spending cuts and tax rises come will be key for the short-term economic outlook.
The Times said most of the spending cuts would be scheduled for after the next election, expected in 2024, and might not be needed if the economy improves.
Hunt risks reviving tensions within the ruling Conservative Party, many of whose members are already upset at the level of Britain's tax burden now.
He is due to extend a freeze on the thresholds for starting to pay income tax, dragging more people into the net. Newspapers said he would cut the threshold for paying the higher rate of income tax by 16 per cent to £125,000 a year.
News reports have said Hunt also plans to bring in more revenue from dividend and capital gains taxes while sources have said he is considering a big increase in a windfall tax on oil and gas firms and extending it to power generation firms.
New spending cuts could add to the public's frustration with over-stretched public services, ranging from a health system bogged down in backlogs to dilapidated public housing.
Adjusted for inflation, budgets have been cut below 2010 levels for many departments with transport spending about 40 per cent down and justice 20 per cent lower, the Institute for Fiscal Studies think-tank estimates.
Opinions polls show the opposition Labour Party has a big lead in opinion polls.
The budget statement will be accompanied by forecasts from the Office for Budget Responsibility which are likely to echo the BoE's message that Britain is heading for a long recession.
Hunt has said he will address one of the drags on Britain's economy which is a shortage of workers in the labour market.
The Financial Times said he would announce a reform to allow insurance firms to invest billions of pounds in green energy and other infrastructure projects.