LONDON — Seeking to restore Britain’s fiscal credibility after a calamitous foray into trickle-down economics, the British government on Thursday announced tens of billions of pounds of tax increases and spending cuts that officials promised would plug a gaping hole in the nation’s public finances.
The chancellor of the Exchequer, Jeremy Hunt, detailed a raft of higher taxes, worth £25 billion, or about $29.7 billion, and cuts to government programs of about £30 billion ($35 billion), though the cost reductions will not take effect for two years. It amounted to one of the most austere budgets ever imposed on Britain, a country that is already in a recession.
The goal is to reduce a public deficit swollen by vast government payouts during the coronavirus pandemic and the energy crisis. But the budget was also an act of fiscal penitence after the sweeping tax cuts rolled out in September by the last prime minister, Liz Truss. Those proposals roiled the markets, caused the pound to crash and cost Ms. Truss her job a few weeks later.
The remedy prescribed by Mr. Hunt and his boss, Prime Minister Rishi Sunak, will be economically and politically painful. It will raise taxes on tens of millions of Britons, who will find themselves in higher tax brackets, and effectively cut funding for foreign aid and other programs. Funding for the Defense Ministry will be reviewed, Mr. Hunt said, but will also likely fail to keep pace with inflation.
In a stark illustration of the economic squeeze ahead, household disposable income is projected to fall 7 percent over the next two years, according to the Office for Budget Responsibility, Britain’s financial watchdog. That is the largest decline in living standards since the government began keeping records in 1956.
“Anyone who says there are easy answers is not being honest with the British people,” Mr. Hunt said in a closely watched address to Parliament. “We want low taxes and sound money, but Conservatives know sound money must come first.”
Rarely in modern British history has a budget loomed so large. In addition to a recession, which Mr. Hunt confirmed on Thursday, the country is suffering from double-digit inflation — 11.1 percent in October, the government said this week — as well as soaring fuel prices and rising interest rates. Britain shares these woes with other European countries, but its exit from the European Union has aggravated its problems by worsening a labor shortage.
The reverberations are already being felt in the daily lives of Britons. Some people have delayed turning on the heat in their houses; others don’t know how they will be able to pay the higher monthly costs of their mortgages.
Unlike the United States, which has considerable fiscal leeway because of the size of its economy and the dollar’s status as a global reserve currency, Britain, with a smaller economy, operates under self-imposed rules about the size of deficits. Ms. Truss was seen as brazenly flouting those rules, which is why the markets punished the pound and other British assets after she announced her tax-cut proposals.
As Mr. Hunt spoke, the House of Commons veered between tense silence as lawmakers digested the measures and protests from the opposition benches when the chancellor claimed that Britain’s woes were largely a legacy of the pandemic and of the disruption caused by Russia’s invasion of Ukraine. With a comfortable Conservative majority in Parliament, however, the measures are all but certain to be passed.
Mr. Hunt tried to cushion the blow by announcing an increase in the national living wage, which protects lower-paid workers, to £10.42 an hour (just over $12), from £9.50. He unexpectedly announced £2.3 billion ($2.7 billion) in extra funding for schools, as well as £3.3 billion a year in additional funds for the revered National Health Service.
“On the whole, this amounts to quite a progressive package,” said Jonathan Portes, a professor of economics and public policy at Kings College London. “There’s short-term support for lower-income households, and medium term tax increases for better-off people.”
As expected, the government increased and extended a windfall profits tax on energy providers, which have reaped huge gains on skyrocketing oil and gas prices in the wake of Russia’s invasion of Ukraine. Mr. Hunt also imposed a windfall tax on electricity generators and confirmed that Britain would build a new nuclear power plant to diversify its energy sources.
By delaying the spending cuts for two years, the government will push them off until after the next general election, which Mr. Sunak must call by January 2025. That puts the opposition Labour Party in something of a quandary. With a double-digit lead in polls over the Conservatives, Labour could vault into power only to find itself inheriting seriously depleted public services.
“They’ve effectively laid a trap for Labour,” said Mujtaba Rahman, an analyst at the political risk consultancy Eurasia Group. “This is a very political chancellor implementing a very political austerity plan.”
Labour leaders tried to keep the pressure on the government, arguing on Thursday that these measures were necessitated by the economic mismanagement of Ms. Truss and Kwasi Kwarteng, who served as chancellor before Mr. Hunt.
“The chancellor should have come here today to ask for forgiveness,” said the Labour Party’s shadow chancellor, Rachel Reeves. The government, she said, had left Britain with “inflation spiraling, growth plunging, living standards falling.”
Still, with the government having telegraphed many of Mr. Hunt’s measures, the markets largely shrugged off his address. The pound, which had risen in advance of the speech, fell slightly to $1.18.
The budget is a pivotal test for Mr. Sunak, a former chancellor who once worked for Goldman Sachs and has brought a more orthodox, technocratic approach after the supply-side ideology of Ms. Truss. He won a contest to replace Ms. Truss last month after failing to beat her in a leadership campaign in the summer during which he warned that her tax cuts would cause havoc.
Mr. Sunak’s bet is that his plan will put Britain’s finances back on sound footing, claw back its reputation in the markets and position the economy for a rebound before an election. In the short term, however, Mr. Hunt acknowledged that it would deepen the misery for Britain, which is still suffering the aftershocks of Brexit and the coronavirus pandemic.
Some likened the budget to the austerity measures imposed by Prime Minister David Cameron and his chancellor, George Osborne, after the financial crisis of 2009. That hollowed out many of Britain’s public services, including the N.H.S., which has struggled with the crushing burdens of the pandemic.
Conservative lawmakers appeared largely united behind Mr. Sunak. But Jacob Rees-Mogg, a right-wing lawmaker who served in the cabinets of Ms. Truss and former Prime Minister Boris Johnson, criticized the plan for imposing tax increases at a time when Britain was in recession.
Mr. Sunak was said to have been deeply involved in the number crunching with Mr. Hunt. They reportedly wrestled with how to balance tax increases with spending cuts, initially pushing for a roughly 50/50 split, before shifting the emphasis slightly in favor of spending cuts.
Economists generally agree that such a split makes sense. But a study of 17 such fiscal programs dating to 2006 by Oxford Economics, a forecasting and analysis firm, found that barely half of them were ultimately successful in their goal of cutting deficits.
That is especially true in a hostile global economic environment like the one the government faces today. Britain must also deal with the legacy of Ms. Truss’s failed experiment, which still weighs on the country’s reputation for fiscal reliability.
“It will take longer to rebuild that reputation,” Andrew Bailey, the governor of the Bank of England, said on Wednesday to a Parliamentary committee. “We will have to tread carefully.”
Britain’s problems run deeper than its reputation in the financial markets. Among the Group of 7 advanced countries, it is the only one with an economy that is smaller now than it was before the pandemic started. It was recently overtaken by India as the world’s fifth-largest economy.
But Britain’s fiscal misadventure, economists said, left its new government with fewer options to stabilize its finances than it might otherwise have had.
“You could argue that they could have gotten away with something looser,” Professor Portes said of the fiscal plan. “But maybe they thought, ‘we need to overreact a bit to regain credibility.’”
Jason Karaian contributed reporting