The last UK budget nearly crashed the economy. It’s still stuck in the doldrums

The last time a British finance minister unveiled a “budget for growth,” UK financial markets crashed and mortgage rates shot up, threatening to tip an already weak economy into a deep recession. Kwasi Kwarteng was out of office within weeks, to be followed shortly by his boss, former Prime Minister Liz Truss.

UK finance minister Jeremy Hunt will do all he can to avoid the drama that engulfed last September’s “mini” budget when he lays out the government’s spending and tax plans Wednesday. But he will deliver his budget against essentially the same gloomy backdrop: the UK economy is stuck in the doldrums.

The picture has improved a little since Hunt scrapped most of Kwarteng’s disastrous plans for debt-fueled tax cuts and a spending binge. Markets have stabilized, and falling natural gas prices have taken some heat out of inflation, while providing a boost to government finances strained by energy subsidies for households.

But the United Kingdom is the only major economy that the International Monetary Fund forecasts will contract this year; inflation continues to erode pay, worsening a longstanding decline in living standards; supply chains remain fragile; and the country is experiencing the worst wave of strike action in 30 years.

The recent collapse of Silicon Valley Bank could make matters worse, if UK banks respond by extending less credit to households and businesses, weighing on consumer demand and investment spending.

Hunt could announce a boost to public sector pay to put an end to ongoing strike action, economists say. But the chancellor, who has pledged to reduce ballooning government debt, is otherwise expected to keep a tight rein on spending and avoid significant tax cuts.

“On the bright side, this feels like a relatively normal budget. No pandemic, the mini-budget fiasco fading into blissfully distant memory. But if growth doesn’t start to pick up pretty soon, neither this one nor the next [budget] will contain many goodies,” director at the Institute for Fiscal Studies, Paul Johnson, wrote in The Times Monday.