On 10 October 2022, the House of Lords is due to debate a motion moved by Baroness Neville-Rolfe, a minister of state at the Cabinet Office, “that this House takes note of the economy and the Growth Plan 2022”.

The chancellor of the exchequer, Kwasi Kwarteng, made a fiscal statement in the House Commons on 23 September 2022. This has also been described as a ‘mini-budget’. Following the statement, HM Treasury published the government’s ‘Growth plan 2022’ and its supporting documents.

1. Economic background

The fiscal statement was delivered against the background of rising cost of living pressures for UK households, with high inflation, weak growth and rising interest rates.

On 30 September 2022, the Office for National Statistics (ONS) published revised UK GDP statistics which showed a 0.2% increase in the first quarter (April to June) of 2022, revised up from an earlier quarterly estimate of a 0.1% decrease. However, the ONS said that the UK economy “continues to slow”, and that it was the only G7 economy which had not returned to pre-coronavirus levels of real GDP.

The day before the fiscal statement, the Bank of England forecast that the UK GDP would decrease by 0.1% in the third quarter (July to September) of 2022. The bank also raised interest rates by 0.5 percentage points to 2.25%. It was the seventh consecutive rise in interest rates by the bank since December 2021.

The chancellor did not request that the Office for Budget Responsibility (OBR) produce a full fiscal and economic forecast to accompany the fiscal statement. It was reported that the OBR had provided the chancellor with a draft forecast, but this was not made public.

Opposition parties and the Conservative chair of the House of Commons Treasury Committee, Mel Stride MP, criticised the decision not to publish an OBR forecast with the fiscal statement.

2. The statement

The chancellor said the fiscal statement represented a “new approach for a new era”. He continued by saying that “for too long in this country we have indulged in a fight over redistribution”, adding that the new government would “focus on growth […] built around three central priorities: reforming the supply side of the economy; maintaining a responsible approach to the public finances; and cutting taxes to boost growth”. He argued that the growth plan would “unleash the power of the private sector”, with the aim, over the medium term, of reaching “a trend rate of growth of 2.5%”.

The chancellor said that further supply-side regulatory reforms would be announced by the government in the autumn. He said the reforms would cover “the planning system, business regulations, childcare, immigration, agricultural productivity, and digital infrastructure”. Following the statement, the government subsequently confirmed that further information on the reforms would be set out in a “medium-term fiscal plan” on 23 November 2022.

2.1 Tax announcements

Key tax announcements in the fiscal statement included:

  • National insurance contributions (NICs): class 1 and class 4 NICs will be reduced by 1.25 percentage points from November 2022, and the introduction of the health and social care levy as a separate tax from April 2023 will be cancelled. The Health and Social Care Levy (Repeal) Bill has been introduced to Parliament and all its House of Commons stages are due to take place on 11 October 2022.
  • Corporation tax: the main rate of corporation tax will remain at 19%. It was due to increase to 25% from April 2023.
  • Income tax 45% additional rate: the additional rate of income tax will be abolished from April 2023. Currently the additional rate of 45% is charged on taxable income over £150,000. From April 2023, the ‘higher rate’ of 40% will apply to income over £150,000.
  • Income tax basic rate: the reduction in the basic rate of income tax from 20% to 19%, which was due to take effect from April 2024, has been brought forward to April 2023. Income tax thresholds remain frozen until April 2026.
  • Stamp duty land tax: the threshold at which stamp duty is not payable will increase from £125,000 to £250,000. The threshold at which first-time buyers begin to pay stamp duty will increase from £300,000 to £425,000. The maximum value of a property on which first-time buyers’ relief can be claimed will increase from £500,000 to £620,000. The changes took effect from 23 September 2022.
  • Alcohol duties: all alcohol duty rates will be frozen from February 2023.

2.2 Other announcements

Other announcements included:

  • Energy support package: the chancellor confirmed preannounced schemes to support households and non-domestic users with rising energy bills. The energy price guarantee will cap unit prices and standing charges for domestic energy, limiting bills to an average of £2,500 a year for a typical household. The energy bill relief scheme will provide a broadly similar level of support for businesses and other non-domestic energy users for six months. The Treasury estimated that the combined cost of the schemes would be £60bn in 2022/23.
  • Investment zones: investment zones will be established across the UK, which will benefit from “tax incentives, planning liberalisation, and wider support for the local economy”.
  • Abolition of the bankers’ bonus cap: the cap currently limits bonuses to 100% of a banker’s basic salary, or 200% with shareholder approval.
  • Planning and infrastructure: legislation will be introduced to speed up the delivery of major infrastructure projects in England.
  • Industrial action: legislation will be introduced to ensure minimum service levels on transport services, and to require unions to put pay offers to a membership vote.
  • Universal credit: reform of the universal credit administrative earnings threshold will mean around 120,000 more claimants who are in work and on low incomes will be subject to more intensive work coaching to increase their earnings or face having their benefits reduced. The universal credit sanctions regime will also be “strengthened”.

3. Reaction to the statement

3.1 Political reaction

Responding to the statement in the House of Commons, the shadow chancellor, Rachel Reeves, said it amounted to “an admission of 12 years of economic failure” by the government. She criticised the chancellor for confirming that the costs of the energy support package would be funded by borrowing, leaving “the eye-watering windfall profits of the energy giants untaxed”. She said:

This is not a plan for growth, but a plan to reward the already wealthy. It is a return to the trickle down of the past. It is back to the future, not a brave new era.

Alison Thewliss, Scottish National Party Treasury spokesperson, also criticised the statement. She claimed it was not credible that “tax cuts for the rich, whopping bonuses for the bankers and low corporation tax for companies will somehow refloat magically Britain’s sinking economy”. Ms Thewliss said:

Actively choosing to cut taxes permanently and spend eye-watering sums to patch up a failed energy market while inflation soars, interest rates are hiked and recession looms will not create growth; it will create economic chaos.

3.2 Think tanks

The day before the chancellor’s statement, the Institute for Fiscal Studies (IFS) published analysis of the preannounced policies, including the energy support package; the cancellation of the health and social care levy national insurance increase; and the cancellation of the corporation tax increase. The IFS said that, taken together, the proposed measures would put government debt “on an ever-increasing path”. Figure 1 below, reproduced from the IFS analysis, shows the estimated trend in government debt compared to the last OBR estimate in March 2022.

Figure 1. Government debt forecast as a percentage of national income, 2019/20–2026/27

Figure 1: Government debt forecast as a percentage of national income, 2019/20–2026/27

(IFS, ‘Reversing NICs and corporation tax rises would leave debt on an unsustainable path’, 22 September 2022, p 18)

The IFS said:

Allowing debt to rise temporarily to finance one-off packages of support, such as the energy price guarantee or the furlough scheme, in exceptional circumstances is justifiable and can be sustainable, but the same case cannot be made for allowing debt to rise indefinitely in order to enjoy lower taxes now.

The analysis concluded that increased growth would “undoubtedly help” the public finances, but “there is no miracle cure, and setting plans underpinned by the idea that headline tax cuts will deliver a sustained boost to growth is a gamble, at best”.

Following the chancellor’s statement, the IFS’s director, Paul Johnson, said it was “the biggest package of tax cuts in 50 years, without even a semblance of an effort to make the public finance numbers add up”. He claimed that the chancellor’s plan “seems to be to borrow large sums at increasingly expensive rates, put government debt on an unsustainable rising path, and hope that we get better growth”.

Analysis by the Resolution Foundation (RF) concluded that the outcome of the fiscal statement was that “large discretionary, deficit-financed tax cuts are being loaded on top of an already large, but largely unavoidable, borrowing surge [to support energy bills]”. The RF estimated that:

Energy support and the weaker economic outlook will increase borrowing by £265bn over the next five years compared to the OBR’s March forecast. Tax cuts of £146bn over the same period increase that to £411bn.

On the distributional impact of the personal tax announcements in the statement, the RF estimated that they “will overwhelmingly benefit those on the highest incomes in the south of England, while personal taxes are still being increased for the vast majority of earners”. The analysis included the graph reproduced in figure 2, which estimated the distributional impact of the combined tax and benefits changes by 2025/26. It showed that the poorest fifth of households would be slightly better off (by £90 in 2025/26). However, most households in the middle of the income distribution would be worse off, as any gains were more than offset by four years of income tax threshold freezes. The richest 5% of households would be significantly better off (by an average of £2,520 in 2025/26).

Figure 2: Impact of tax and benefit policies by equivalised household income vigintile, after housing costs, in 2022/23 prices: UK, 2025/26

Figure 2: Impact of tax and benefit policies by equivalised household income vigintile, after housing costs, in 2022/23 prices: UK, 2025/26

(Resolution Foundation, ‘Blowing the budget’, 24 September 2022, p 14)

However, Mark Littlewood, director general of the free-market think tank the Institute of Economic Affairs, welcomed the fiscal statement. He said:

This isn’t a trickle-down budget, it’s a boost-up budget. The government has announced a radical set of policies to increase Britain’s prosperity […] Only by bearing down on the amount of tax the state collects across the income spectrum, and reducing the regulatory burden, can we create better conditions for growth.

3.3 Financial markets

Following the fiscal statement there was volatility in the financial markets, leading to an increase in government borrowing costs and a devaluation of sterling against the US dollar and other international currencies. On 26 September 2022, the pound reached a record low against the US dollar, with £1 worth $1.03. Sterling subsequently rose to erase its earlier losses, although its value remains volatile.

On 27 September 2022, the International Monetary Fund (IMF) issued a statement which urged the UK government to “re-evaluate” the tax cuts in the fiscal statement. The IMF said:

Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.

On 28 September 2022, the Bank of England announced that it was intervening in the bond market in response to “significant repricing of UK and global financial assets”. The bank said that “were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability”. The bank announced that it would begin “temporary purchases of long-dated UK government bonds” in order to “restore orderly market conditions”.

On 29 September 2022, the prime minister, Liz Truss, defended the announcements in the fiscal statement. She said she was prepared to make “controversial and difficult decisions”, and her government’s growth plan was the “right plan” to increase economic growth in the long term.

4. Recent developments

On 30 September 2022, the chancellor and the prime minister met with the OBR’s budget responsibility committee to discuss the economic outlook and the fiscal forecast the OBR was preparing to accompany the chancellor’s ‘medium-term fiscal plan’ on 23 November 2022. The OBR said it would provide the chancellor with a “first iteration” of its fiscal forecast on 7 October 2022.

During the 2022 Conservative Party conference, several Conservative MPs criticised the policy to abolish the 45% higher rate of income tax. Michael Gove (Conservative MP for Surrey Heath) said funding the tax cut through borrowing was “not Conservative”. It was reported that a group of Conservative MPs were prepared to vote against the policy in the House of Commons.

On 3 October 2022, the chancellor announced that the government would not proceed with abolishing the 45% rate of income tax. He said it had become a “distraction” from the other policies in the growth plan.

In the chancellor’s speech to the Conservative Party conference later the same day, Kwasi Kwarteng noted that the fiscal statement “has caused a little turbulence”. On the 45% rate of income tax, he said the government “are listening and have listened”. However, he committed to proceed with the rest of the policies in the fiscal statement. He said that he would “shortly” publish details of the medium-term fiscal plan and the accompanying OBR fiscal forecast. This was reported by some parts of the press as an announcement to bring forward the date of the OBR’s fiscal forecast from the original date of 23 November 2022. However, the chancellor subsequently confirmed that the OBR forecast and the medium-term fiscal plan would not be published until 23 November 2022.

Paul Johnson, the director of the IFS, reacting to the chancellor’s decision to retain the 45% income tax rate, stated that it was of “limited fiscal significance”. He said abolishing the rate would have had a medium-term cost of £2bn, therefore the chancellor’s “£45 billion package of tax cuts has now become a £43 billion package”. He added:

The chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability. Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services.

5. Read more

5.1 Representative bodies

5.2 Think tanks

5.3 Press and others

Cover image by Public Domain Pictures on Pixabay.

This article was updated on 7 October 2022 to reflect announcements made during the 2022 Conservative Party conference.