Digging us out of a hole – or just digging a bigger hole?

Luke Morris, Corporate Finance Partner gives his personal take on today’s Fiscal Event announcements

23 September 2022 - Luke Morris

The first question I had ahead of today was, “why is this a ‘Fiscal Event’ and not a Budget?”

Kwasi has announced £45bn of tax cuts. The IFS has said this is the “biggest tax cutting event in half a century” (Anthony Barber in 1972 if you are interested). And all outside of a Budget.

The answer to my question is straightforward: Liz Truss knows she has about 18 months before an Election, so wanted to crack on. Rishi Sunak started the Fiscal Event craze, his £70bn furlough scheme (cost: 3% of GDP) also went through outside of a Budget, on the nod.

I wonder if we will see a continuation of this extra-Budgetary trend?

Other benefits to Liz of a Fiscal Event concern scrutiny: if the Government wants to hold a Budget outside the usual cycle, it needs to provide 10 weeks’ notice to the OBR. So, no supporting forecasts needed this time. Plus, far less parliamentary scrutiny of the like we see with the set piece Budget.

Why don’t you ask your bank if you can borrow a wedge of cash with no supporting financial forecasts, see what they say? Good luck.

Let’s look at the economic backdrop and reaction:

The main measure

Tweaking the tax system (which Kwasi has done) or cutting public expenditure (which he has not) are the two main levers of Budgets past, fraught with politics, yet both are puny tools in the grand scheme of things. You can find a talking head economist to argue for none, either or both.

However, there is one thing that economists do tend to agree on. The main measure of how wealthy we feel is, in fact, GDP per head.

Going in to today (and if we ignore the Nick Clegg years and coalition) we have now had a pure Conservative Government since the election of 7 May 2015. Seven years, four and a half months.

Compound annual growth in inflation-adjusted GDP per head is 1.09% during that period. 1.09%! That is failure by any measure (the comparable figure for the USA is 4.40%).

If GDP per head goes up, we are all paying more tax with no tax rate changes necessary. There is more money for public services.

It is the bazooka option, compared to the typical Budget BB gun measures.

I understand the “Fresh Start” thing for Liz, but it would have been more impressive if Kwasi had had the guts to apologise for the mismanagement inflicted by his government during the past seven years, four and a half months. “It hasn’t worked, shutting down the world-wide economy for covid was a blunder, and we have got energy policy completely wrong. We are now trying something different. It’s a bit of a gamble but bear with us”. (I guess I would never make it in politics…)

So Liz is gambling on growth here. And the reason it is a gamble is, whilst economists can agree that GDP per head is the main measure, they cannot agree on how to grow it. This is sometimes referred to as the “productivity puzzle”.

Initial reactions

In the wake of the announcement, money market pricing showed traders now put 50% odds on a 100 basis point hike at the Bank of England in November. This implies the market believes the measures taken by the Government will stimulate growth, but crucially, growth that will stimulate longer-term inflation.

At 10:40 BST a sudden sell-off occurred, and the chart above is a snapshot of the Pound to Euro exchange rate highlighting the volatility (thanks to www.poundsterlinglive.com).

So this morning the Pound has dropped like a stone. It seems the initial market sentiment is little faith in Kwasi’s plan. How high will interest rates need to go to arrest the fall, and how much income do you need before the tax reductions are more than your mortgage increase?? That’s the unknown.


I must admit, I am wondering how the Bank of England is feeling right now. They think they are increasing rates to dampen demand, stop inflation and get to their “2% inflation target”. In the meantime, Kwasi gives us fiscal stimulus.

I can feel an argument brewing. Let’s see.

The first principles reason for increasing interest rates is to remove money from the system — exactly what increasing fuel prices has done. In the current climate, interest rates have little effect on this other than removing yet more money from the economy and making life a lot harder, fuelling more wage inflation and pushing the economy into a deeper recession.

When in a hole, stop digging. Liz Truss thinks she has a way to dig us out. Only time will tell, but there is not much time.


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