The Mini-Budget: First Thoughts
A big - and much better targeted - fiscal package. But where does it leave the Bank? And what happens next year?
That was big.
It also looks to be a reasonably well-designed package, in that the additional fiscal support is much better targeted towards the households most at risk from rising energy bills.
Indeed, it’s really the package that should have been put in place to begin with.
While a fuller analysis will have to wait until we have more numbers, this should both meaningful offset – allow by no means entirely reverse – the expected fall in real household disposable income this year and provide some relief to household consumption. It certainly makes me a touch more bullish on GDP growth this year.
Where does it leave the Bank?
That’s the first big question. The Governor has been repeating his analogy that he is currently walking ‘a narrow path’ between letting inflation expectations become unanchored and tightening policy too much so that an already soggy outlook becomes a recession at every public appearance since the last MPC meeting. The announcement of net £10bn fiscal expansion makes that narrow path all the more treacherous.
It’s hard to not view it as additional ammunition for the committee’s hawks. The next few speeches from MPC members will be especially interesting. It is reasonable to expect some of the additional impetus from fiscal expansion to be swallowed up by more monetary tightening.
The Chancellor is surely right to focus his firepower on households. But the impacts of soaring energy bills on firms – and also schools and other parts of the public sector – should not be forgotten. ONS survey data puts energy bills as the second most cited worry from private firms at the moment and that can only be expected to rise. It is always worth remembering that firms, unlike households, are not subject to a price cap. Anecdotally I am hearing of SME after SME getting absolutely clobbered by rising bills. Not to mention schools being forced to cut back in other areas to keep the lights on.
The politics of this are tricky.
I don’t envy government ministers doing the rounds and selling this in the days, weeks and months ahead. The overall macroeconomic giveaway is large but still not enough to cover the all pain. Telling middle earning households ‘we have provided £600 of support” may sound pretty shallow as energy bills rise by £1,200 over a year and other costs continue to rise.
The political business cycle is even more broken.
The pandemic knocking the political business cycle out of whack has been a long running theme of this newsletter. Today’s news adds to that. Yes, a third of the package will be funded by the windfall tax but £10bn or so will be borrowed. The margin of error that the Chancellor has to meet his medium-term fiscal rules is being seriously eroded.
It’s looking increasingly hard to see the fiscal space (assuming the rules remain in place) to announce additional pre-election giveaways in 2024.
This was a budget.
Whatever the Chancellor wants to call it, a £15bn spending package and £5bn of tax rises is a large fiscal event: in reality it’s a budget. Just like last September’s NICS rise/social care package was.
As a basic matter of procedure, such fiscal events should be accompanied by forecasts, policy costing and proper numbers from the Office for Budget Responsibility.
What happens next year?
This is the really big unanswered question. Implicit to the entire package is a belief that energy prices will fall in 2023. The government is extending extraordinary support to help households cope with, what is hopefully, a temporary period of high global energy prices.
But it is worth asking: what if prices stay high in 2023? Will the package be left in place? This is the kind of thing HMT civil servants will be worrying about this evening.
If you’re enjoying Value Added, please do subscribe. You’ll get more posts and I’ll get the resources to carry on producing it.