Rishi Sunak warned against fresh austerity drive to finance tax cuts

Rishi Sunak has been warned against launching a fresh austerity drive after official figures confirmed Britain’s economy is in recession and living standards have suffered their longest sustained fall since records began almost 70 years ago.

With the government under pressure over its economic management, Treasury sources said the chancellor, Jeremy Hunt, was considering a fresh squeeze on public spending to finance pre-election tax cuts in next month’s budget.

But unions said it was an “outrage” that the chancellor was looking to balance the books by forcing more austerity on to services that were already on their knees – while a leading thinktank described any moves to cut taxes as “ludicrous”.

Figures from the Office for National Statistics showed the economy shrank by 0.3% in the three months to December, handing Labour the ammunition to claim Sunak’s plans lay “in tatters” after 14 years of the Conservatives underinvesting in Britain.

The contraction followed a drop of 0.1% in the three months to September, confirming a second consecutive quarter of falling national output – the technical definition of a recession – with the ONS warning that the picture would have looked even worse had it not been for a rising population.

Highlighting a deep economic malaise amid the cost of living crisis, the figures revealed national income per head fell or flatlined for seven consecutive quarters – the worst run since modern records began in 1955.

In a bid to regain ground after a highly damaging week for Labour, the shadow chancellor, Rachel Reeves, insisted the opposition had a plan to kickstart growth and rejected criticism the party lacked difference from the Conservatives.

“This is Rishi’s recession,” Reeves said. “He says he has a plan, but the plan is not working. We are going backwards.”

The contraction in national output has blown a hole in the prime minister’s five key priorities for 2023, with a growing economy now joining a cut to NHS waiting lists as an undelivered promise, exposing Sunak to heavy fire from within his own ranks as the party prepares to defend its record in the run-up to an election.

Hunt insisted the worst for the economy was over and that Britain was “turning a corner” as he made the case for a tax-cutting budget next month to reboot the Tories’ standing in opinion polls.

“Although times are still tough for many families, we must stick to the plan – cutting taxes on work and business to build a stronger economy,” he said.

With the government scrambling to restore economic credibility, Hunt’s allies say he is determined to offer an agenda-setting package of tax cuts at the 6 March budget, even if they are unlikely to be on the same scale as the 2p cut to national insurance announced at the autumn statement in November.

However, Britain’s weaker growth performance could constrain his room for tax giveaways. The chancellor is thought to have been left with about £8bn less to play with than previously thought thanks to the rising cost of government debt, which is likely to leave him with around £13bn of headroom in March.

As a result, sources said Hunt was considering steeper departmental cuts to take effect after the election, to the dismay of trade unions who warned of severe damage from a fresh austerity drive with public services already in steep decline.

“It is an outrage that the chancellor is again looking to use a recession he caused as an excuse to load more austerity on to public services that are already on their knees,” said Sharon Graham, the Unite general secretary.

“Labour needs to pay attention – this government’s disastrous economic decision-making is not a model to follow.”

Torsten Bell, the chief executive of the Resolution Foundation, said the recession news should serve as a wake-up call for the government and opposition parties in the run-up to the election. “We’ve got to do better than today’s debate about ludicrous tax cuts we can’t afford, and pencilled in spending cuts we can’t deliver,” he said.

The ONS said that over the course of 2023 the economy had essentially flatlined, expanding by just 0.1%. It was the weakest performance outside of the pandemic year of 2020 since the UK was gripped by the global financial crisis in 2009.

Tim Leunig, a former economic adviser to Sunak during his time as chancellor, said the figures showing the collapse in living standards over the past seven quarters was “something that has not happened since records began almost 70 years ago. Our country is in a deep, deep mess.”

Reeves last week watered down plans to spend £28bn a year on greening the economy but “entirely rejected” accusations that the U-turn meant Labour was offering no real alternative to existing policies.

“Unlike this prime minister and this chancellor, Keir Starmer and I have got a real plan,” she said.

“The Conservatives have no plan. We have a serious plan that we’ve worked on with business and the green prosperity plan is still there.

“A national wealth fund to invest in carbon capture and storage, in green hydrogen, in our steel industry, as well as Great British energy with an endowment to invest in nuclear, tidal and floating offshore wind, there’s a plan.”

The shadow chancellor said Labour would be fighting the election on the economy and would be asking voters whether they felt better off than when the Tories came to power in 2010. “It is time to turn the page on 14 years of economic failure,” she said.

Reeves refused to be drawn on whether she would back the tax cuts widely expected from Hunt in next month’s budget. Any support from Labour would depend on the state of the public finances and the forecasts from the government’s spending watchdog, the Office for Budget Responsibility.

Asked about murmurs that Hunt was planning tax cuts which might entail spending cuts on public services, in a possible trap for Labour ahead of the election, she said: “I do recognise that our public services are under huge pressure, unlike perhaps the Conservatives do, which is why I’ve said there does need to be an immediate injection of cash into our public services.”

Economists had widely expected a shallow recession at the end of last year as households came under pressure from higher borrowing costs and rising prices for everyday essentials, forcing cuts elsewhere. Widespread strikes across the economy and heavy rainfall also dampened activity.

More recent snapshots from the economy have, however, shown a rebound in consumer confidence.

Nevertheless, many Tories acknowledge that the political damage may already have been done. George Osborne, the former chancellor, said on his Political Currency podcast: “It will cast a pall over the government’s economic message, there’s no doubt about that. The government will have a tougher time with their economic message.”

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