Mini Budget 2022: Going for growth or going for bust?

The UK budget revealed a marked departure from the previous government’s conservative approach, Liz Truss is choosing a riskier path in a bid to revive growth through a mix of tax cuts, consumption and business boosting, de-regulation, union weakening and unemployment disincentives. This was published on 23 September 2022.

*For the latest information please see our mini budget summary

In post-pandemic times, the British economy is facing steep global imbalances along with its own idiosyncratic Brexit challenges. The world is a very uncertain place right now, and there are no easy solutions. The previous government chose mild austerity to preserve the UK’s fiscal position, in hopes that the international environment would improve quickly enough to mitigate consumer pain. This government is essentially doubling down. It will try to stimulate the economy to prevent consumer pain, in hopes of an even faster global economic improvement, which could see the necessary drop in borrowing yields. Resurging growth could end up paying for it all. Failing growth, however, would cause a massive rise in debt levels, maybe even costing the economy a downgrade on its bonds.

This is certainly a ‘brave’ budget, not afraid to risk losing votes or incurring higher debt in a bid to boost growth.

But will it succeed?

The danger lies not in the course taken, but in the difficulty of implementation. There are several factors that must be overcome for growth to take hold:

The markets might not give Mr Kwarteng the time necessary for his plan to succeed. Traders, most of whom have never experienced such radical fiscal action in the UK, already reacted negatively. Two hours after the announcement, the Pound was losing 3% to the Dollar.
Inflation could grow as the Pound loses ground. This could wipe out consumer savings from taxes.
The Bank of England may decide to hike interest rates faster, to defend the Pound and stop imported inflation. Higher interest rates would mean that savings from taxes would end up being paid in higher mortgages.
Global growth could continue to drop, affecting the demand for British exports and the prices for British imports.
The de-regulation announced, as well as plans to prop up the British financial sector, could be hamstrung as Brexit negotiations which may determine access to European markets have yet to take place.

One could see this as government gambling. However, we believe that lack of visibility and easy solutions renders any action, or inaction for that matter, similarly risky. Success is not the result of ‘getting the formula right’ as much as ‘getting people on board’. People like international investors, local and global businesses, important trading partners and of course the local consumers. It is now on markets and the other stakeholders of the UK economy to decide whether they would invest in this bold new direction, or whether they would hold out for a better one.

We think we might have the answers to this sooner rather than later.