The Treasury estimates that the mini-Budget will cost the exchequer £45 billion a year without including the cost of the energy price cap. This is almost certainly too high. Cebr has done detailed calculations on the impact of cutting higher rate tax and on the cost of tax free shopping which suggest they will generate increased rather than reduced revenues within about five years. For various other measures, like the cost of reducing the corporation tax, the Treasury’s estimated cost looks very much on the high side. But even allowing for extra growth we estimate that the cost of today’s measures will be about £25 billion.
There are two questions – is today enough to stave off recession and can the bill be afforded?
My answers are “Probably not” and “possibly” to these two questions. Our modelling predicts a lower pound (down nearly 3% on the trade weighted index) and higher interest rates (up 60 basis points). Obviously these numbers have a huge margin of error and if the markets don’t like what they see, these numbers could be a lot higher. On the other hand, there is a lot of additional tax revenue being generated by higher inflation and fiscal drag and both of these will over time reduce borrowing, though more in 2024/25 than in the coming fiscal year. A lot will depend on the cost of the gas price cap. At today’s market price, this would add about £70 billion to borrowing in 2023/24 but that number could be much less if, as we expect, the price falls.
So the increased borrowing is one risk, together with those of sterling weakness and higher rises in interest rates than would otherwise be required. The initial reaction in both forex and bond markets has not been positive.
On the other hand, I do expect that the measures will lead to higher GDP – boosted more than 2% by 2030, higher investment which could be raised more than 10% by then, higher employment and higher productivity. The trouble is that the forecasts indicate that the main effects of these only coming through over the 5-10 year horizon. Little is forecast to happen immediately. The recession which has seemed likely in the short term probably won’t be avoided.
There are many other measures promised that are intended to boost growth. It is important that these are announced quickly to sustain confidence. The government and its supporters are likely to face a bumpy ride in the markets until benefits of their new approach start to feed through. They will do well to keep their nerve.
Douglas McWilliams is Founder and Deputy Chairman of Cebr.
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