23 Sep 2022 3 min read

A mini-budget, or a pre-election budget in disguise?

By James Carrick

Without cutting public spending, economic gains from supply-side reforms risk being swallowed by the cost of tax cuts. Global Economist James Carrick offers a between-the-lines reading of Friday’s mini-budget.


In case you missed it, the gilt market had something of a moment on Friday. In the wake of Chancellor Kwasi Kwarteng’s mini ‘budget’, yields rose to 3.8% versus 3.5% at the start of the day, having been 2% a month ago. Sterling, meanwhile, slumped further against the US dollar.

Part of the reason for the rise in yields was the market putting pressure on the Bank of England to go for bigger interest rate rises in the months ahead to offset the consequences of fiscal stimulus. There were also concerns around fiscal sustainability.

By the time you read this blog, the situation may have changed again. As ever, market participants are acting based on partial information. On this occasion, half of the equation was there (tax cuts), but the other half (spending plans) remains a mystery.

We don’t know what the government plans to do about spending either, but we can consider some potential scenarios based on the half of the equation we’ve seen.

Mr. Taxman, meet Edward Scissorhands

While many of the big giveaways – energy subsidies, cancelled rises in National Insurance Contributions and corporation tax, and stamp duty reforms – were pre-announced, some of the details of the biggest set of tax cuts for decades were kept until the day.

The basic rate of income tax fell from 20p in the pound to 19p, while the 45p additional rate of tax, payable on earnings above £150,000, was abolished.

Other measures were unambiguously aimed at boosting business investment in Britain, such as investment zones and higher capital allowances, quicker planning applications, and the abolition of the cap on bankers’ bonuses.

What’s next?

Elsewhere on the supply side, the mini-budget included measures to take the sting out of strike action through minimum service agreements and making unions put pay offers to members. There were also incentives for those on in-work benefits to seek more hours.

These two policies indicate that we might see pay and benefit restraint in the public sector. If spending levels remain at the levels laid out during Boris Johnson’s tenure, then the giveaways will likely outweigh the supply-side effects.

The government calculated the net cost of the easing measures at around 1% of GDP this fiscal year (i.e. until March), rising to 2% of GDP by 2025, mainly due to corporation tax reform. Energy subsidies, meanwhile, are expected to cost an additional 3% of GDP this fiscal year.

We have an upcoming blog on the UK’s Energy Price Guarantee and its effects on borrowing, inflation and GDP. This should make interesting reading for politicians in Italy (where elections will be held over the weekend) and elsewhere in Europe as they mull energy price cuts and the knock-on effect for government borrowing costs.

All of this raises the question of whether the mini-budget might in fact have been a pre-election budget in disguise. Politically, there’s an argument that calling an election soon, while the ink of the headlines announcing tax giveaways is still wet, might be a good move if bad news on public spending is around the corner.

Is 2.5% growth realistic?

While supply-side reforms are good news, they will take time to bear fruit and in the meantime demand will be stronger.

The economy is at full employment, and while Kwarteng alluded to boosting participation through increased job coaching for the over-50s and those on in-work benefits, the 2.5% GDP growth target seems optimistic given our previous work on demographics and peak education.

Ultimately, the question for the government is this: do they still want to level up, or only trickle down? That’s key for the sustainability of the public finances.

James Carrick

Global economist

James is a global economist with a knack for using analogies to explain economic concepts. He is a techno-optimist and an early adopter. He enjoys building models - both of the economy and robot Lego ones with his son. He also likes crunching data and chocolate bars. He joined in 2006 from the number-one ranked economics team at ABN AMRO with prior experience at HM Treasury.

James Carrick