Relief meets fear as UK budget calms economy but brings pain

LONDON (AP) — Britain’s Conservative government on Friday defended its decision to hike taxes for millions of working people in the “squeezed middle” class as it tries to shore up an economy battered by double-digit inflation and the reckless tax-cutting of recently ousted Prime Minister Liz Truss.

An emergency budget announced by Treasury chief Jeremy Hunt on Thursday includes 25 billion pounds ($30 billion) in tax hikes, including higher income tax for middle and top earners and steeper local household taxes. The Treasury acknowledged that the moves will take taxes as a share of national income to its highest level since World War II.

The combination of high inflation – predicted to be 9.1% for 2022, largely driven by soaring energy costs from Russia’s invasion of Ukraine – and stagnating salaries means a 7% decline in U.K. living standards over the next two years, according to the Office for Budget Responsibility, the government’s fiscal watchdog.

“The truth is, we just got a lot poorer,” Paul Johnson, director of the Institute for Fiscal Studies think tank, said.

“We’re in for a long, hard, unpleasant journey,” he added, with “high borrowing, high debt, high tax and public spending under strain.”

Hunt reversed the billions of pounds in unfunded tax cuts announced by his predecessor Kwasi Kwarteng less than two months ago – a package that spooked financial markets, sent the pound plunging to a record low against the U.S. dollar and forced emergency intervention from the Bank of England.

Hunt also renounced the central principle touted by Kwarteng and Truss: that lower taxes are the key to economic growth.

“Sound money matters more than low taxes,” he said. “None of this is easy, but it’s the right thing to do.”

The emergency budget largely postponed public...