Britain's economy is forecast to shrink next year, finance minister Jeremy Hunt has said as he outlined how he and Prime Minister Rishi Sunak will raise taxes and cut spending to repair the public finances, despite a grim outlook.
The new forecast is for gross domestic product to contract by 1.4 per cent next year compared with a projection for growth of 1.8 per cent in the previous outlook published in March by the Office for Budget Responsibility (OBR).
Since then, Britain's economy has come under strain from an inflation rate now above 11 per cent, a slowing global economy and political and severe financial market volatility during Liz Truss's brief term as prime minister.
Hunt said the OBR forecasts laid out "starkly the impact of global headwinds on the UK economy" as he started a speech to parliament on Thursday.
The OBR forecast gross domestic product would grow by 1.3 per cent in 2024 and by 2.6 per cent in 2025, Hunt said, compared with its previous forecasts for growth of 2.1 per cent and 1.8 per cent respectively.
Hunt and Sunak have said they will restore investor confidence in Britain after the failed "Trussonomics" experiment with unfunded tax cuts that sent the pound to an all-time low against the US dollar, threatened chaos in the housing market and forced Truss to quit after just 50 days in Downing Street.
Hunt said the OBR judged that Britain - where high inflation is creating a cost-of-living crisis - is already in recession. It is the only Group of Seven nation yet to recover its pre-pandemic size, having previously suffered a decade of near-stagnant income growth.
Hunt said on Thursday he would freeze income tax allowances until 2028 and was lowering the threshold above which the 45 per cent top rate of income tax is paid to STG125,140 from STG150,000.
"Even after that, we will still have the most generous set of tax-free allowances of any G7 country," Hunt told parliament.
He had warned of more pain in his budget statement in the days leading up to Thursday's announcement.
Hunt also said the government would increase a windfall tax on oil and gas firms and extend it to power generation firms as he seeks to raise money to plug the hole in the public finances.
He said the levy would be increased to 35 per cent from its current rate of 25 per cent. It would also apply to electricity generators with a levy of 45 per cent being applied from January 1.
Hunt has said he can only slow the rise in borrowing costs if he can show investors that Britain's STG2.45 trillion debt mountain will start to fall as a share of economic output.
Critics have warned against a return to the kind of tight controls on spending pursued by the ruling Conservative Party for much of the past 12 years, saying it will hurt already stretched public services and the lives of millions of households, deepening the expected recession in the process.