The September 2022 mini-budget: some thoughts from an expert – 29 September 2022 update

Butler Toll’s Economics Adviser, John Shepperd, gives his immediate thoughts on the Chancellor’s mini-budget announced on 23 September 2022.

29 September 2022

This is an odd crisis in that it is one of the Government’s own making. The first “fiscal event” which capped energy prices was seen as reasonable, given it was a reaction to an “exogenous shock” – an event outside of the Government’s control. What turned a difficult situation into a full-blown crisis was the second “fiscal event” when Kwarteng rather casually – in a 30 minutes speech to the House – announced the largest package of tax cuts in 50 years. No official costings or forecasts, just the vague hope that trend growth could be boosted to 2.5%. This was supported by a thin and rather pathetic paper by the Treasury, the “Growth Plan”, which seems to have sunk without a trace.

Despite media coverage which always generally seemed to start with a graph of the £/$ exchange rate, at its heart this was never a “sterling crisis”. It is a fiscal deficit crisis, a borrowing crisis. In short, a gilt-market crisis. Which became all too apparent when the BoE announced its intention to buy gilts “on whatever scale is necessary” to “restore orderly market conditions” and to avoid a pension funds melt-down.

The BoE has made it clear it has no intention of making any policy move until the next MPC meeting on 3 November. The Government (Treasury) has said the next planned key event is the announcement of Kwarteng’s Medium Term Fiscal Plan on 23 November, which will also see a new set of forecasts – fiscal and economic – from the OBR.

So what happens now? Perhaps two broad possibilities:

The MPC meeting is a over month away and the announcement from Kwarteng nearly two months away. The BoE’s “temporary” gilt buying plan extends to 14 October, although one assumes it could be extended. If (gilt) market turmoil continues, and backbench Conservative MPs panic, then some “re-evaluation” (in the polite phrase of the IMF) or, more starkly, a U-turn is forced on the government. If this happens, Kwarteng goes, either by saying or resignation. In which case can Truss survive? I suspect not and the Conservative “men in suits” would stick the knife in. Her vison is inexorably linked to his. As The Economist headlines today “Liz Truss’s new Government may already be dead in the water”. Step forward Rishi Sunak.

Somehow the government (and Kwarteng) survive the next couple of months. How is he ever going to convince through his Medium Term Fiscal Plan that what he is proposing is responsible and consistent with a falling borrowing requirement and stock of debt? And what will the OBR say, given there is not a cat in hell’s chance it will be convinced that sustained 2.5% GDP growth is a possibility, even in the medium term? It is difficult to see how this circle can ever be squared.

More questions than answers perhaps, but you are inevitably drawn to the conclusion that what is being proposed is so unrealistic and so out of touch with reality, that at some stage chickens will come home to roost. Either in the coming few weeks (days?) or, if it is possible that they last that long, in November. Economically, this plan is doomed to failure. In which case, it is politically doomed as well.

23 September 2022

It is outrageous that we have seen two massive fiscal packages that have been made outside of the remit of the Office For Budget Responsibility. The partial costings we have come from the Treasury. The OBR was set up as an independent body to assess the fiscal and economic outlook precisely to avoid the Treasury coming up with the figures. This is shoddy and irresponsible decision-making on a massive scale.

What can be gleaned on first impressions from the Treasury document The Growth Plan 2022 (full of wishful thinking about getting trend growth up to 2.5%) is that in 2022-23 today’s tax changes will cost about £20bn, while the energy support package could cost £60bn. The borrowing requirement this year (2022-23 – the only full-year figures available) is forecast at £234bn, up from the April estimate’s (from the OBR) of £162bn.

The extra £72bn of borrowing will come from an additional £60bn of gilt sales and an extra £10bn of Treasury Bill sales. Note these are additional sales, and at a time when the BoE will probably be selling gilts to reduce its QE holdings. As Nigel Lawson once said, “a billion here and a billion there and soon you are talking about real money.”

No official forecasts of course, but the hope is that the measures will “reduce the risk of the UK economy entering a deep and damaging recession” So not avoiding recession, just a “deep and damaging” one. The 2.5% sustained growth will have to wait, it seems (possibly until hell freezes over).

Note that UK consumer confidence slumped again in September – sharply down to a new record low (since 1974). Flash PMIs for September were much as expected. Worse again in Germany with the composite output index now at 45.9, and across the Eurozone as a whole at 48.2. In the UK the services PMI slipped below 50 for the first time in a while to 49.2, with the manufacturing output index at 44.4. A composite output index at 48.4. These imply a slow descent into recession around Europe.


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