This article was first published in The House magazine – 13th October 2022
The mini-Budget was poorly handled. If it had just stuck to what was announced during the leadership campaign, it would have been fine. The United Kingdom was the only G7 country unwisely raising taxes going into a global downturn. Reversing the National Insurance increase, cancelling the planned corporation tax rise, plus fixing the energy levy had already been discounted by the markets and were seen as necessary to prevent a deep recession that would have blown the public finances out of the water.
Going further than this without any Office of Budget Responsibility forecasts, however, and failing to communicate that tax cuts are just one lever of the government’s economic policy, fed the misplaced idea that it was only about tax cuts with little concern for fiscal discipline. This also meant that many positive growth aspects of the accompanying Growth Plan, which were welcomed by the Confederation of British Industry, the Institute of Directors and the Federation of Small Businesses, were overlooked.
Importantly, though, it is too simplistic to blame all the subsequent financial problems on the mini-Budget – even though that is the narrative that has gained momentum. It clearly played a key part, but you have to ask: why was it that markets were in such a febrile mood ahead of it? How is it that the Bank of England and the regulators took no preventative action although aware many UK pension funds had exposed themselves to unnecessary leverage? And how is it that few at Westminster seem prepared to hold the Bank to account for 14 years of cheap money policies that have left the economy and markets extremely vulnerable to higher interest rates?
The end of cheap money is the biggest challenge and points to major problems ahead. The problems facing some pension funds are an indication of this.
The global backdrop ahead of the mini-Budget did not help, but more particularly the Bank was seen as being behind the curve in tackling inflation. It also announced it would sell gilts through quantitative tightening even though the market had enough to absorb.
If anything, all this reinforces the vital role fiscal policy can play in stabilising the economy and addressing downside risks. But fiscal discipline is crucial, and you have to take the markets with you. Bringing forward the announcement of the Medium-Term Fiscal Plan is welcome and allows the Chancellor to outline his fiscal principles, while allaying misplaced fears about institutions. The challenge, however, is that some of the damage from mishandling the mini-Budget cannot be undone.
An immediate challenge is to show the fiscal plans are affordable. The Institute for Fiscal Studies (IFS) suggests there is a £60bn budget gap. The margin of error on fiscal forecasts can be sizeable and they are very sensitive to the economic assumptions made. For instance, the IFS’s latest sums were predicated on a pessimistic growth forecast from Citibank. But as the IFS noted, higher growth – using the margin built into the March 2022 forecast and pushing back the ratio of debt to GDP falling until 2026/27 – “would be enough to cover the deterioration of the public finances seen since March”.
But if there is a gap, the Chancellor may have to revise his tax plans – letting corporation tax rise is the most likely. Or he may have to find spending cuts. Plus the OBR could factor in tough government plans for future growth in public spending. This would help point to future debt to GDP falling.
While the PM is right to focus on the pro-growth strategy, after anaemic levels of growth since the 2008 global financial crisis, an immediate challenge is convincing the markets that her plans are necessary, non-inflationary and affordable.