An Independent Assessment of the Mini-Budget

Main Points

• We now forecast that the energy support guarantee, together with the tax cuts announced today, will lead to positive GDP growth in the fourth quarter of this year, shortening the recession and raising annual GDP growth to around 2 per cent over 2023-24.
• The potential inflationary effects of this are likely to lead the Bank of England to raise rates more aggressively than we previously expected. We now expect the Bank rate to peak at around 5 per cent in the third quarter of 2023.
• We expect the extra government spending and tax cuts to increase the government deficit by around £150 billion (roughly 5 per cent of GDP); we now forecast public sector debt to rise to 91.6 per cent of GDP in 2024-25, rather than fall to 87.5 per cent of GDP.
• We welcome the focus on growth and investment but we question whether the measures announced today will reduce regional disparities: while London and the South East have grown by 2.4 per cent per year on average since the financial crisis of 2008-09, the rest of the country has grown by about 1 per cent – well below the target trend growth rate of 2.5 per cent.
• We also welcome government support for household energy bills but we regret that the chosen policy represents a general subsidy for all households rather than targeted assistance for those who need it most, as we have argued in our proposal for a variable price cap.
• We expect that low-income households, which do not qualify for tax credits, pension credits, legacy benefits or Universal Credit, will receive financial help that falls short of the increase in energy bills (nearly £2,000) and in food bills.

The government is facing a recession with high and increasing inflation and rising interest rates. The most recent GDP data showed growth of 0.2 per cent in economic output between June and July. However, as we argued in our recent GDP Tracker, we think that this was affected by the additional Bank Holidays in June. Our view is that the UK economy entered recession in the second quarter of this year (with ONS data showing a fall in GDP of 0.1 per cent) and will remain there until the first quarter of next year, with a further fall of 0.1 per cent in the third quarter of this year and falls of 0.5 per cent in each of the fourth quarter of this year and first quarter of next year.

At the same time, we forecast inflation to rise from its current rate of 9.9 per cent in August of this year to a peak of between 11 and 12 per cent in January of next year. As discussed in our blog, the announced energy price guarantee has taken 2 percentage points off the peak in inflation but, potentially, lengthened the time it will take inflation to fall back to its 2 per cent target.  And with inflation high and rising, we expect the Monetary Policy Committee of the Bank of England (MPC) to continue raising interest rates from the 2.25 per cent rate announced yesterday to 5 per cent by the end of September of next year.