UK government budget
On 23 September 2022, the Chancellor of the Exchequer, Kwasi Kwarteng, delivered a Ministerial Statement entitled "The Growth Plan" to the House of Commons. Widely referred to in the media as a mini-budget (it not being an official budget statement), it contained a set of economic policies and tax cuts such as bringing forward the planned 1% cut in the basic rate of income tax to 19%; abolishing the highest (45%) rate of income tax in England, Wales and Northern Ireland; reversing a plan announced in March 2021 to increase corporation tax from 19% to 25% from April 2023; reversing the April 2022 increase in National Insurance; and cancelling the proposed Health and Social Care Levy. Following widespread negative response to the mini-budget, the planned abolition of the 45% tax rate was reversed 10 days later, while plans to cancel the increase in corporation tax were reversed 21 days later.
The mini-budget was among the first measures of the Truss ministry, which had begun on 6 September. The statement was delivered against the backdrop of a cost-of-living crisis and was immediately followed by a sharp fall in the value of the pound sterling against the US dollar as world markets reacted negatively to the increased borrowing required. They also appeared to be concerned that no independent forecast by the Office for Budget Responsibility (OBR) had been published. By the next day of trading, the pound had hit an all-time low against the US dollar. The mini-budget drew widespread criticism from economists, some of whom feared that its reliance on increased government borrowing to pay for the largest tax cuts in 50 years could lead to a situation similar to the 1976 sterling crisis when the UK was forced to ask the International Monetary Fund (IMF) for a financial bailout. The IMF took the unusual step of issuing an openly critical response to the budget, saying it would "likely increase inequality". It urged the UK government to "re-evaluate" the proposed tax cuts. HM Treasury announced plans to outline in November how the proposals would be costed, this being later brought forward to 31 October, alongside an independent forecast from the OBR.
Despite continued market turbulence, and calls from Members of Parliament including members of the Conservative Party for a policy reversal, Prime Minister Liz Truss and Kwarteng maintained that the proposals outlined in the mini-budget would go ahead. Speculation began to mount about Truss's future as prime minister, and on 14 October she summoned Kwarteng back to the UK from a meeting of finance ministers in Washington, D.C., and asked for his resignation. Truss then appointed Jeremy Hunt to replace him. Hunt subsequently reversed the majority of the tax cuts that had been outlined in the mini-budget, a decision that led to a positive market reaction. Following Truss's resignation on 25 October, her successor Rishi Sunak retained Hunt as Chancellor. The 31 October statement was moved to 17 November in order to base it on the "most accurate possible" economic forecasts, and was also upgraded to a full autumn statement.
Initial reaction to the mini-budget was mixed. The "Daily Mail" called it a "true Tory budget", while Frances O'Grady, the General Secretary of the Trades Union Congress, branded it "Robin Hood in reverse". Faisal Islam, the BBC's economics editor, described the mini-budget's reversal as "the biggest U-turn in British economic history". William Keegan, the former economics editor of "The Observer", wrote that the plans outlined in the statement had shown a misunderstanding of Thatcherism and its attitude towards taxation.
Background.
The mini-budget took place against the backdrop of a cost of living crisis with inflation at high levels, and energy costs in particular rising sharply. During the Conservative Party leadership election held between July and September 2022, Liz Truss advocated for an emergency budget implementing significant reductions in taxation and adoption of radical free market policies, as previously outlined in "Britannia Unchained", a political thesis released in 2012, which was advocated by right-leaning think tanks, particularly those based at 55 Tufton Street. Despite criticism about the viability of such policies from her rival Rishi Sunak and political commentators, Truss won the leadership election and became Prime Minister in September 2022. Truss subsequently appointed "Britannia Unchained" co-author Kwasi Kwarteng as Chancellor of the Exchequer. On 15 September 2022, it was reported that Kwarteng was planning to announce an emergency budget on 23 September. At the time, Parliament was in recess following the death of Elizabeth II and government business was suspended until after the funeral. Her chief economic adviser was Matthew Sinclair.
On 21 September, ahead of the budget, and having previously announced plans to cap the price of household energy bills for two years, the UK government announced a scheme that would freeze wholesale gas and electricity prices for businesses for six months from 1 October. This was followed the next day with the announcement that a 1.25% rise in National Insurance contributions that took effect from April 2022 would be reversed from 6 November. On the same day it was announced that plans to introduce the Health and Social Care Levy in April 2023 would be scrapped. The Bank of England also increased the UK interest rate by 1.75 to 2.25%, the biggest increase in 27 years, in an attempt to curb inflation. Ongoing concerns about a possible recession were impacted when the Bank of England also suggested the UK may already have entered recession.
Prior to the statement, the Office for Budget Responsibility, a body that provides independent analysis of public finance, offered to produce a forecast to accompany the mini-budget, but this was turned down by the government. Truss has claimed that the government did not have time to wait for the OBR's report, but the OBR has said it would have been ready to produce one in time for 23 September. It was subsequently reported that shortly after Truss took office, senior civil servants at the Treasury and the Cabinet Office advised her against introducing large tax cuts funded by borrowing without an independent growth forecast from the Office for Budget Responsibility, fearing it would be a high risk strategy and too much of a shock to the economy. Notably, the Permanent Secretary to the Treasury, Tom Scholar, was sacked by Truss upon her entering office, after six years in the role.
On the eve of the mini-budget and writing for "The Guardian", the newspaper's economics editor, Larry Elliott noted its significance, observing that "most full-blown budgets matter little and are quickly forgotten" but that "this one is a very big deal indeed" as it would mark a change in the approach to the management of the UK economy, when previously the focus had been on balancing the government's books, something former Prime Minister Margaret Thatcher had likened to a housewife managing her household budget. The economic philosophy adopted by Truss and Kwarteng, that lower taxes would pay for themselves by encouraging economic growth, a theory known as supply-side economics and called by critics trickle-down economics, earned the name Trussonomics, and sought to "challenge Treasury orthodoxy" by running the economy differently. Following Truss' resignation and Rishi Sunak's appointment as Prime Minister, Kwarteng said in a November 2022 interview that he warned Truss that she was "going too fast" with her ill-fated economic plans.
On 12 December 2022, treasury officials told MPs Kwarteng neglected warnings the mini-budget could cause a backlash in financial markets. James Bowler, the Permanent Secretary to the Treasury, said he was "absolutely confident Treasury officials set out the right advice" to Kwarteng but could not persuade him to change things, saying "officials advise but ministers decide". Treasury civil servant Beth Russell told the Commons Treasury Select Committee she and another civil servant "are confident that we gave all the advice to ministers" over the economic and fiscal background, the consequences, the market situation specially over the financing needs, "which was a big issue because of the cost of the measures". Russell maintained officials gave the best advice but ministers take decisions.
The budget.
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The mini-budget, also known as "The Growth Plan", was designed to boost economic growth through tax cuts, which would be paid for by increasing the United Kingdom national debt. The package, worth £161 billion over five years plus £60 billion for the 2022–2023 energy bills support package, would have represented the biggest tax cut in the UK since the 1972 "dash for growth" budget of Anthony Barber. The budget also set an annual growth target of 2.5%. "The Guardian" observed that in spite of the number of measures announced in the statement (which involved much greater amounts than in some budgets), HM Treasury had described the statement as a "fiscal event" because the Office for Budget Responsibility had not been asked to provide analysis of the measures announced.
The Resolution Foundation calculates that the mini-budget cost the UK Treasury £30bn, the Truss government caused roughly that amount of the fiscal hole which the Treasury claims is £60bn. The Resolution Foundation estimates that Truss and Kwasi Kwarteng lost £20bn through unfunded cuts to national insurance and stamp duty, and another £10bn were lost through raised interest rates and government borrowing costs as the markets reacted to the budget.
Key points.
The key points announced in the mini-budget are as follows:
The Chancellor also announced the closure of the Office of Tax Simplification, effective when the next Finance Bill received royal assent.
Reaction.
Currency, interest rate, and debt.
On 23 September, and following the mini-budget, the pound sterling fell sharply in response to the government's planned spending increases and tax cuts, losing 3% against the US dollar and dropping below $1.09. It also fell 0.75% against the euro. On 26 September, sterling reached an all-time low against the dollar, dropping to $1.0327, its lowest since Decimal Day in 1971. As a result, the probability of pound–dollar parity by the end of 2022, a situation when £1.00 is worth $1.00, increased to 60%. Following a slight recovery, it fell again on 28 September to $1.05. On 30 September, and after another slight recovery, the pound fell again, to $1.1082, following an emergency meeting between Truss, Kwarteng and the Office for Budget Responsibility, and when the Treasury resisted calls for the early publication of an OBR forecast. On 3 October, and following Kwarteng's announcement of a reversal of the plans to scrap the higher rate of income tax, the pound rose to pre-mini-budget levels, reaching $1.13, before dropping slightly to $1.12. The following day it rose to $1.14 after Kwarteng's announcement that an Office for Budget Responsibility report would be published "shortly". On 11 October the pound again fell, reaching a two-week low, after Andrew Bailey, the Governor of the Bank of England, confirmed the end of a scheme to buy government bonds, before settling at $1.10. On 13 October, the pound recovered after Sky News reported government discussions were taking place about possible changes to the fiscal plan, reaching a one week high of $1.12540. Stocks and bonds also recovered following the reports. By the next day it had reached $1.13 amid speculation of a possible reversal of the policy, but dropped to $1.12 again after a hastily arranged press conference at which Truss announced the reversal of plans to scrap the raise in corporation tax. The pound strengthened after Hunt reversed the majority of the planned tax cuts on 17 October, rising to $1.13, and ended the day at $1.14. Following Rishi Sunak's appointment as prime minister on 25 October, Sterling rose to $1.149, its highest level since mid-September.
On 26 September, and in a bid to calm the markets, the Treasury announced that Kwarteng would publish a medium term fiscal plan on 23 November and that the UK's fiscal watchdog, the Office for Budget Responsibility, would produce a forecast, both giving more details of how the measures would be costed. On the same day the Bank of England said it would "not hesitate" to raise interest rates and was "monitoring developments closely" but would not meet again to decide on interest rate levels until November. The following day the Bank's chief economist, Huw Pill, said it would have to deliver a "significant monetary policy response".
On 27 September, banks and building societies withdrew some mortgage products amid concerns about an increase in the interest rate. Virgin Money and the Skipton Building Society stopped mortgage offers