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

London CNN

Last time a British finance minister presented a "budget for growth", the UK financial markets crashed, and mortgage rates shot up. This threatened to plunge an already weak economy into deep recession. Kwasi Kwarteng left office in just a few weeks and was soon replaced by Liz Truss, the former Prime Minister.

Jeremy Hunt, UK finance minister, will try his best to avoid the drama surrounding last September's mini' budget. He will present Wednesday's government's spending plans and tax plans. He will present his budget with the same grim backdrop: The UK's economy is in the midst of a recession.

Since Hunt ended Kwartengs terrible plans for tax cuts and spending sprees that were debt-fueled, the picture has changed a bit. The markets have stabilized and falling natural gas prices have helped to reduce inflation while also providing an injection of money for government finances that were being squeezed by subsidies for energy.

The International Monetary Fund predicts that the United Kingdom will be the only major economy to contract this year. Inflation continues to decline, worsening the long-term decline in living standards. Supply chains are fragile and the country is currently experiencing the worst wave in strike action in 30+ years.

If UK banks respond to the recent collapse of Silicon Valley Bank by extending less credit for households and businesses, it could worsen matters, which could impact consumer demand and investment spending.

Over 133,000 civil servants will walk out Wednesday over pay, pensions, and job security. Teachers, transport workers, junior physicians, and some BBC journalists will join them.

Economists believe Hunt could announce an increase in public sector pay to end ongoing strikes. The chancellor has already pledged to lower the government's ballooning debt but is expected to maintain tight control on spending and avoid major tax cuts.

This budget feels normal, on the bright side. There is no pandemic. The mini-budget fiasco will fade into a blissfully distant memory. Paul Johnson, director of the Institute for Fiscal Studies, said in The Times Monday that if growth does not pick up soon, neither this budget nor the next [budget] will have many goodies.

"A stagnant economy leaves little space for more spending or lower taxes."

Britain's Growth Problem

Hunt is expected not to accept the "narrative that the UK economy is in decline" despite a long list of problems facing it, including Brexit and labor shortages.

"In the autumn, we made difficult decisions to deliver stability as well as sound money. According to prepared remarks by the UK Treasury, he will say that today, we have delivered the next part to our plan: a budget to grow.

"Not only growth from emerging from a downturn. Our country is one of the most successful in the world, and we need to be able to sustain long-term, sustainable, and healthy growth.

Britain has a growth problem. It is the only G7 country that has not regained its pre-pandemic size.

Hunt will likely announce incentives to boost business investment. This has been a slowing trend since 2016's Brexit referendum. However, Hunt is expected not to change his plans to raise corporation tax from 19% - 25%.

According to the British Chambers of Commerce, the UK's economy will not recover to pre-pandemic levels until the last quarter of 2024. The Bank of England expects full recovery in 2026.

Brexit is partially to blame. The EU's exit has impacted growth in part by increasing import prices, weakening exports and causing labor shortages.

John Springford, deputy Director at the Centre for European Reform estimates that Brexit has cost the UK's economy 5.5% of its GDP by June 2022.

Catherine L. Mann is a member of Bank of England's Monetary Policy Committee. She describes Brexit as a unique third shock to the UK's economy. This includes the pandemic in Ukraine and the war in Ukraine.

In a speech last month, she stated that "No other country" had unilaterally imposed trade barriers on its nearest trading partners.

It is rare for any other country to unilaterally impose trade restrictions on its closest trading partners.

Catherine L. Mann, Bank of England

According to the Office for National Statistics there are more than 1,000,000 vacancies in the country. 21% of the population is considered 'economically inactive'. This means they are not seeking work and are not employed.

Other important factors are early retirement and ill-health.

Hunt will announce a series of measures in the budget to help 'hundreds' of thousands more people return to work. These include more generous childcare benefits, support services for those with long-term conditions, and an increase in tax-free retirement allowances to encourage older workers to stay in their jobs.

The Institute of Directors continues to see staff shortages as a 'critical problem' for members of their business community.

Kitty Ussher (chief economist at the professional organization), stated in a Tuesday statement that she would be seeking action in the budget to shift the dial, and create a labor market that is more beneficial for businesses.

SVB could reduce UK bank lending

The Silicon Valley Bank is another factor that could impact the UK's economy in the short term.

SVB's collapse has impacted banking stocks all over the globe, including the United Kingdom where financial services play a significant role in the economy. Kallum Pickering, Berenberg's senior economist, said that although the selloff will not cause a wider banking meltdown it could make lenders more cautious. This could have important implications.

Pickering stated Monday that it is likely that the UK's financial conditions will be tighter (or potentially more tight) in the coming months than they would without the US banking problems. "All things being equal, tighter financial terms will impact consumer demand and decrease the availability of credit to invest.

Paul Dales, the chief UK economist at Capital Economics, stated that if banks reduce or reprice lending, this could make the UK recession "a touch larger" than the predicted 1% drop.

"But, as it stands now, it doesn’t seem as though a repetition of the global financial crises is on the horizon, during which the UK real GDP fell to 6%," he said.