Chancellor Hunt cuts social security contributions as growth downgraded

London — British chancellor of the exchequer Jeremy Hunt announced on Wednesday a bigger-than-expected cut in employees’ social security contributions and made incentives for business investment permanent in a bid to speed up the country’s sluggish economy.

Hunt, who is seeking to boost the fortunes of Prime Minister Rishi Sunak’s struggling Conservative Party ahead of an election expected in 2024, announced big increases in welfare payments and the state pension.

He said the government was nevertheless set to meet its targets for the public finances, citing forecasts from the Office for Budget Responsibility (OBR), Britain’s fiscal watchdog.

“After a global pandemic and energy crisis, we have taken difficult decisions to put our economy back on track,” Hunt said at the start of his speech.

“Rather than a recession, the economy has grown. Rather than falling as predicted, real incomes have risen. Our plan for the British economy is working. But the work is not done.”

To cheers from Conservative MPs, Hunt announced he was cutting the rate of contributions to the national insurance social security system for employees by two percentage points to 10%, along with a smaller cut for self-employed workers.

He said measures in his plan announced on Wednesday would increase business investment by about £20bn a year within a decade, or nearly 1% of GDP.

“That is the biggest ever boost for business investment in modern times,” Hunt said.

In the short term, at least, Britain’s economy looks stuck in a slow gear.

GDP is expected to grow by 0.7% in 2024, much weaker than the expansion of 1.8% forecast in the OBR’s previous outlook, published in March.

The OBR also said economic output would grow by 1.4% in 2025 and by 1.9% in 2026 — weaker than its previous forecasts of 2.5% and 2.1%, respectively.

Britain’s economy has struggled with high inflation and the new OBR forecasts showed the consumer price index was expected to grow by 2.8% next year, up from the March forecast of 0.9%.

Sunak this week promised “responsible” tax cuts, mindful of last year’s “mini-budget” turmoil in financial markets triggered by his predecessor Liz Truss’ plans for much bigger tax cuts.

This time last year, the newly installed Sunak and Hunt raised taxes sharply to quell the bond market mayhem, and the current parliament is seen to be on track to have introduced the biggest tax increases of any UK legislature since World War 2.

Britain’s economy has been burdened by the highest inflation rate among its rich country peers, though the pace of price growth has slowed from more than 11% just over a year ago to 4.6% in October.

The budget watchdog’s new forecasts pointed to a slightly slower pace of government borrowing in the coming years — on average £700m less per year than forecast in March.

Reuters