September 2022 United Kingdom mini-budget


On 23 September 2022, the Chancellor of the Exchequer, Kwasi Kwarteng, delivered a Ministerial Statement entitled "The Growth Plan" to the House of Commons. Widely referred to in the media as a mini-budget, it contained a set of economic policies and tax cuts such as bringing forward the planned 1% cut in the basic rate of income tax to 19%; abolishing the highest rate of income tax in England, Wales and Northern Ireland; reversing a plan announced in March 2021 to increase corporation tax from 19% to 25% from April 2023; reversing the April 2022 increase in National Insurance; and cancelling the proposed Health and Social Care Levy. Following widespread negative response to the mini-budget, the planned abolition of the 45% tax rate was reversed 10 days later, while plans to cancel the increase in corporation tax were reversed 21 days later.
The mini-budget was among the first measures of the Truss ministry, which had begun on 6 September. The statement was delivered against the backdrop of a cost-of-living crisis and was immediately followed by a sharp fall in the value of the pound sterling against the US dollar as world markets reacted negatively to the increased borrowing required. They also appeared to be concerned that no independent forecast by the Office for Budget Responsibility had been published. By the next day of trading, the pound had hit an all-time low against the US dollar. The mini-budget drew widespread criticism from economists, some of whom feared that its reliance on increased government borrowing to pay for the largest tax cuts in 50 years could lead to a situation similar to the 1976 sterling crisis when the UK was forced to ask the International Monetary Fund for a financial bailout. The IMF took the unusual step of issuing an openly critical response to the budget, saying it would "likely increase inequality". It urged the UK government to "re-evaluate" the proposed tax cuts. HM Treasury announced plans to outline in November how the proposals would be costed, this being later brought forward to 31 October, alongside an independent forecast from the OBR.
Despite continued market turbulence, and calls from Members of Parliament including members of the Conservative Party for a policy reversal, Prime Minister Liz Truss and Kwarteng maintained that the proposals outlined in the mini-budget would go ahead. Speculation began to mount about Truss's future as prime minister, and on 14 October she summoned Kwarteng back to the UK from a meeting of finance ministers in Washington, D.C., and asked for his resignation. Truss then appointed Jeremy Hunt to replace him. Hunt subsequently reversed the majority of the tax cuts that had been outlined in the mini-budget, a decision that led to a positive market reaction. Following Truss's resignation on 25 October, her successor Rishi Sunak retained Hunt as Chancellor. The 31 October statement was moved to 17 November in order to base it on the "most accurate possible" economic forecasts, and was also upgraded to a full autumn statement.
Initial reaction to the mini-budget was mixed. The Daily Mail called it a "true Tory budget", while Frances O'Grady, the General Secretary of the Trades Union Congress, branded it "Robin Hood in reverse". Faisal Islam, the BBC's economics editor, described the mini-budget's reversal as "the biggest U-turn in British economic history". William Keegan, the former economics editor of The Observer, wrote that the plans outlined in the statement had shown a misunderstanding of Thatcherism and its attitude towards taxation.

Background

The mini-budget took place against the backdrop of a cost of living crisis with inflation at high levels, and energy costs in particular rising sharply. During the Conservative Party leadership election held between July and September 2022, Liz Truss advocated for an emergency budget implementing significant reductions in taxation and adoption of radical free market policies, as previously outlined in Britannia Unchained, a political thesis released in 2012, which was advocated by right-leaning think tanks, particularly those based at 55 Tufton Street. Despite criticism about the viability of such policies from her rival Rishi Sunak and political commentators, Truss won the leadership election and became Prime Minister in September 2022. Truss subsequently appointed Britannia Unchained co-author Kwasi Kwarteng as Chancellor of the Exchequer. On 15 September 2022, it was reported that Kwarteng was planning to announce an emergency budget on 23 September. At the time, Parliament was in recess following the death of Elizabeth II and government business was suspended until after the funeral. Her chief economic adviser was Matthew Sinclair.
File:Kwasi Kwarteng Official Cabinet Portrait, September 2022 .jpg|thumb|The mini budget was delivered in the House of Commons by Kwasi Kwarteng, the Chancellor of the Exchequer.
On 21 September, ahead of the budget, and having previously announced plans to cap the price of household energy bills for two years, the UK government announced a scheme that would freeze wholesale gas and electricity prices for businesses for six months from 1 October. This was followed the next day with the announcement that a 1.25% rise in National Insurance contributions that took effect from April 2022 would be reversed from 6 November. On the same day it was announced that plans to introduce the Health and Social Care Levy in April 2023 would be scrapped. The Bank of England also increased the UK interest rate by 1.75 to 2.25%, the biggest increase in 27 years, in an attempt to curb inflation. Ongoing concerns about a possible recession were impacted when the Bank of England also suggested the UK may already have entered recession.
Prior to the statement, the Office for Budget Responsibility, a body that provides independent analysis of public finance, offered to produce a forecast to accompany the mini-budget, but this was turned down by the government. Truss has claimed that the government did not have time to wait for the OBR's report, but the OBR has said it would have been ready to produce one in time for 23 September. It was subsequently reported that shortly after Truss took office, senior civil servants at the Treasury and the Cabinet Office advised her against introducing large tax cuts funded by borrowing without an independent growth forecast from the Office for Budget Responsibility, fearing it would be a high risk strategy and too much of a shock to the economy. Notably, the Permanent Secretary to the Treasury, Tom Scholar, was sacked by Truss upon her entering office, after six years in the role.
On the eve of the mini-budget and writing for The Guardian, the newspaper's economics editor, Larry Elliott noted its significance, observing that "most full-blown budgets matter little and are quickly forgotten" but that "this one is a very big deal indeed" as it would mark a change in the approach to the management of the UK economy, when previously the focus had been on balancing the government's books, something former Prime Minister Margaret Thatcher had likened to a housewife managing her household budget. The economic philosophy adopted by Truss and Kwarteng, that lower taxes would pay for themselves by encouraging economic growth, a theory known as supply-side economics and called by critics trickle-down economics, earned the name Trussonomics, and sought to "challenge Treasury orthodoxy" by running the economy differently. Following Truss' resignation and Rishi Sunak's appointment as Prime Minister, Kwarteng said in a November 2022 interview that he warned Truss that she was "going too fast" with her ill-fated economic plans.
On 12 December 2022, treasury officials told MPs Kwarteng neglected warnings the mini-budget could cause a backlash in financial markets. James Bowler, the Permanent Secretary to the Treasury, said he was "absolutely confident Treasury officials set out the right advice" to Kwarteng but could not persuade him to change things, saying "officials advise but ministers decide". Treasury civil servant Beth Russell told the Commons Treasury Select Committee she and another civil servant "are confident that we gave all the advice to ministers" over the economic and fiscal background, the consequences, the market situation specially over the financing needs, "which was a big issue because of the cost of the measures". Russell maintained officials gave the best advice but ministers take decisions.

The budget

The mini-budget, also known as "The Growth Plan", was designed to boost economic growth through tax cuts, which would be paid for by increasing the United Kingdom national debt. The package, worth £161 billion over five years plus £60 billion for the 2022–2023 energy bills support package, would have represented the biggest tax cut in the UK since the 1972 "dash for growth" budget of Anthony Barber. The budget also set an annual growth target of 2.5%. The Guardian observed that in spite of the number of measures announced in the statement, HM Treasury had described the statement as a "fiscal event" because the Office for Budget Responsibility had not been asked to provide analysis of the measures announced.
The Resolution Foundation calculates that the mini-budget cost the UK Treasury £30bn, the Truss government caused roughly that amount of the fiscal hole which the Treasury claims is £60bn. The Resolution Foundation estimates that Truss and Kwasi Kwarteng lost £20bn through unfunded cuts to national insurance and stamp duty, and another £10bn were lost through raised interest rates and government borrowing costs as the markets reacted to the budget.

Key points

The key points announced in the mini-budget are as follows:
  • Cut in the basic rate of income tax to 19% from April 2023, instead of April 2024 as previously announced
  • The 45% additional rate of income tax to be abolished for the highest earners in England, Wales and Northern Ireland from April 2023
  • From 6 November, reversal of the 1.25% rise in National Insurance introduced in April 2022
  • Plans to introduce the Health and Social Care Levy from April 2023 scrapped
  • Plan to scrap an increase of corporation tax from 19% to 25% in April 2023
  • Around 120,000 more people on Universal Credit to be asked to look for more work or face benefit sanctions
  • People over 50 will be given more time with job coaches to help them find work
  • Repeal of 2017 and 2021 reforms to IR35 anti-avoidance tax legislation governing off-payroll work
  • Annual tax-free corporate investment allowance to remain at £1m indefinitely
  • Regulations change to allow pension funds to increase UK investments
  • Tax relief for investors, allowing new and start-up companies to raise up to £250,000 of investment
  • Maximum share options for employees doubled from £30,000 to £60,000
  • Stamp duty threshold lifted to £250,000 with immediate effect
  • A two-year freeze on energy bills that will cost an estimated £60bn over six months, and is forecast to reduce inflation by 5%
  • The limit on bankers' bonuses is scrapped
  • Re-introduce VAT-free shopping for overseas visitors, extended to visitors from EU
  • Scrapping of planned increases in the duties on beer, cider, wine and spirits
  • Plans for investment zones in England, with 38 initially proposed
  • Liberalising of planning laws and scrapping of EU planning regulations
The Chancellor also announced the closure of the Office of Tax Simplification, effective when the next Finance Bill received royal assent.