Last week was en extraordinary one for the UK which ended with the new Chancellor of the Exchequer Kwasi Kwarteng being sent to spend more time with the family he hasn’t got. So we got a new one Jeremy Hunt who probably could not believe his luck. The appointment came with something of an early fiscal U-Turn.
And by any measure, Prime Minister Liz Truss’ decision to scrap the cancellation of her former leadership rival Rishi Sunak’s rise on corporation tax is one of the biggest fiscal U-turns on record.
Over five years, it is worth £67bn, the biggest single revenue measure of the mini-budget. ( BBC )
So we have already seen quite a change and over the weekend it was a case of “More! More! More!” as Andrea True Connection would say.
Instead Hunt, installed as chancellor last Friday, is expected to issue a statement on new tax and spending measures at 11am before making a Commons statement this afternoon. ( Financial Times)
We can also review things via some media number-crunching as the £67 billion of the BBC above becomes this in the Financial Times or FT.
Truss has already reversed £20bn of tax cuts since the disastrous “mini” Budget on September 23,
I prefer the FT version as these moves are for now and no-one has any idea of the situation next month let alone in a year or two. Actually there does not seem to be much detail on what is expected today.
A cut in income tax of one percentage point next April, costing about £5bn, is expected to be put on hold, but that is only expected to represent the start of another series of U-turns. (FT)
Which are?
A £13bn cut in national insurance rates, contained in the mini-Budget and supported by Labour, is expected to survive, but Hunt has said that all other measures in the ill-fated “mini” Budget were on the table. ( FT)
So they are not sure so we are left with the rhetoric of the Institute for Fiscal Studies for the FT to cling to.
The Institute for Fiscal Studies has said a £60bn fiscal tightening will be required to make the sums add up, implying that Hunt will have to go much further in reversing tax cuts, raising taxes and cutting spending.
To be fair to the IFS they did point out that one needs to take great care with these sorts of forecasts.
There is huge uncertainty around the exact magnitude, but under a central forecast in 2026–27 we expect borrowing of £103 billion, which would be £71 billion higher than forecast in March. Much of this increase is uncertain
I have less faith in them here because with inflation so strong combined with the uncertain economic position right now combined with the fact that UK bond yields have been very volatile means this may well be next week’s if not tomorrow’s chip paper.
We forecast that spending on debt interest will be £103 billion in 2023–24, double the £51 billion forecast by the OBR in March and which was already an upwards revision on the £39 billion the OBR forecast in October 2021.
Thus this becomes embarrassing in terms of meaning anything.
But even in 2026–27 we forecast that debt interest spending will be £66 billion, some £18 billion higher than forecast by the OBR in March, £26 billion more than forecast in October 2021 and £9 billion more than was spent in 2021–22, as a result of higher interest rates and a higher level of accumulated debt.
We do eventually get to the £60 billion or so.
Under Citi’s central forecast, it would require a fiscal tightening of £62 billion in 2026–27 to stabilise debt as a fraction of national income – so even reversing all of the permanent tax cuts in Mr Kwarteng’s ‘mini-Budget’ would not be enough
But then a simple sentence provides where I have been heading. A small change in economic growth makes an enormous difference.
Higher growth would help – but even if growth turned out to be 0.25 percentage points a year stronger than Citi expects, a fiscal tightening of £41 billion would be required to stabilise debt.
There is a real irony there because we see that a relatively small amount of economic growth would would wipe out the “black hole”. Of course the original mini-Budget was supposed to achieve that although we have little idea if it would have worked. Also to add another layer to the issue which is that we have struggled for some time to get much economic growth at all. So we end up with a multi-layed level of uncertainty replacing the “£62 billion”.
The Bank of England
The Governor Andrew Bailey has avoided some of the London storm by staying in Washington. Although of course he created his own storm last Tuesday night. He spoke over the weekend and let us start with inflation.
In early August, we estimated that the direct effects of higher energy prices – that’s not including indirect effects – would contribute around 6½ percentage points to inflation towards the end of this year. Our assessment was that inflation would peak at around 13%, and then come down sharply – other things equal – to the 2% target in two years’ time, before falling further to 0.8% in three years.
As you can see he is shuffling away the blame for half of the rise in inflation. Unfortunately for him we can look up what he told us in August 2021.
We expect inflation to fall back, reaching our target in around two years’ time.
How is that going? More specifically he thought it would peak at 4%. Now some of the energy price rise is due to the Ukraine war but he is ignoring the fact that energy price rises were already happening. So let us reduce his “swerve” from 6 1/2% to 4% meaning he has had a disaster.
The main thrust of his speech was to be found here.
We will not hesitate to raise interest rates to meet the inflation target. And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.
This has been widely reported with one missing bit.We have heard all this before from him. If we look back to September last year he ramped up the prospects for an interest-rate rise in a speech with “Hard Yards” in the title but then did not act in November and made the smallest rise ever in December ( 0.15%). Meanwhile the inflation fires were burning.
Comment
There is a lot of ground we have covered to today. But let me return to fiscal policy and the point that it is in the end economic growth which drives the figures. Next up is the fact that many who were promoting fiscal policy now seemed to have swerved to a form of austerity with no explanation of why?! The reality is that they are shuffling away from the fact that the policies they were cheerleading for threw petrol on inflationary fires.
If we return to the Bank of England there is another apparent irony in that in my view the same interest-rate increase they failed to provide last time (0.75%) is back on the menu. Also they have a fortnight to scrap their plans for £80 billion of bond sales. On the more positive front the £19.3 billion of bond purchases do seem to have helped calm things although the road to fewer bond holdings has in fact increased them.
Oh and as someone who is careful with numbers it is hard not not shake my head at all the reports on social media that the Bank of England spent £65 billion and even worse that it has lost it.
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