Quite the fiscal event

The UK government are providing a substantial amount of stimulus to the economy relative to previous fiscal plans. As well confirming the energy bill support for firms and households, the Chancellor has announced a plethora of other measures many of which cancel planned tax changes but also extend to things like tax simplification and promising planning reform.

Their estimate for the total cost of the policy measures announced today (ex-energy bill package) are put at around £45bn by the government by 2026-27 (i.e. about 2% of current GDP) and a net £19bn this fiscal year. They give a figure for the cost of the energy bill package, but only for this year, at £60bn. However, the cost of the bill freeze will depend on market energy prices and is therefore inherently uncertain. Their costing figures are not final either and will be updated at the next Office for Budget Responsibility (OBR) forecasts.

The most expensive measures (on their estimates) are the cancellation of planned corporation tax increases and the reversal of the temporary increase in National Insurance/health and social care levy. Other measures include cutting stamp duty and abolishing the additional rate of income tax. They are also getting rid of the bankers bonus cap, tightening the Universal Credit sanctions regime, reversing the planned dividend tax increase, promising planning reforms, freezing alcohol duty, creating investment zones - all among other changes. This sounded very much like a full Budget rather than a ‘fiscal event’.

Unlike a normal full budget, however, we have no independent OBR forecasts to go alongside all this, so no new deficit or debt forecasts for example. That will come later in the year.

As for how all this will be paid for, the short answer is borrowing. There were a few things announced today that are expected to raise revenue but these are small and the largest offsetting item in the ledger was the previously announced energy profits levy (under the previous chancellor). It is clear though that the government expect all their reforms to boost growth and therefore ultimately help pay for the policies through higher tax revenue...

It is important to note that the government see all the changes that they announced today as “a new approach for a new era”... This was not presented as a Budget, but a 'Growth Plan'. They want to incentivise growth in the supply side of the economy (e.g. increasing incentives for firms to invest) and reform taxes to create virtuous circle where growth is boosted. There is a big element of ideology behind all these changes… and an ideology that comes with a fair bit of controversy.

It will be interesting to see what the OBR has to say about all this; how much they expect public sector net borrowing will need to rise and how much they expect these measures to boost growth and therefore pay for themselves. Those expensive corporation tax cuts, for example, may not boost growth much (e.g. via incentivizing investment spending) while the economic environment is so uncertain and interest rates are rising.

On the overall approach to fiscal discipline, Chancellor Kwarteng listed “maintaining fiscal discipline” as a key part of their growth plan. However, we’ll have to wait for the OBR forecasts (due before the end of the year) to get a government update on its position on the fiscal rules.

It is a risk to add lots of fiscal stimulus when the unemployment rate is very low and inflation is very high. Some of the changes announced today should work on the supply side of the economy, but quite a lot of them should boost demand relative to where it would otherwise have been. Domestically-driven inflationary pressure is already picking up in the UK. Stimulating the economy so much now, runs the risk that interest rate hikes will need to be much more substantial and painful to get inflation back sustainably to target.

To be clear, all this fiscal intervention – especially the previously announced energy bill freeze - lowers the risk of a substantial recession as the economy continues to weaken. Today’s September Purchasing Managers’ Index (PMI) surveys showed a further deterioration in the composite PMI to 48.4 after 49.6. Consumer confidence overnight was again very weak, despite the energy bill freeze announcement.

Gilt issuance looks set to be substantially higher in coming quarters than previously anticipated and at a time when the Bank of England will be selling bonds too (QT). The Debt Management Office (DMO) announced planned gilt sales of £193.9bn from the £131.5bn announced in April.

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