Did the Truss-Kwarteng mini-Budget really cost the UK £74 bn? Truss not guilty says report

Dodgy claims and daft statistics

A guest article by renowned independent economist Julian Jessop

Did the Truss/Kwarteng mini-Budget really cost the UK £ [insert huge number here] billion?

Let’s start with the biggest number: £74 billion

This figure (sometimes cited as £73 billion) appears to have been lifted from a headline in the Daily Express (26th October) which claimed that ‘Kwasi Kwarteng’s budget blunder cost UK an eye-watering £74 billion, finance chief reveals’.

Digging deeper, this was the Debt Management Office (DMO’s) estimate of the increase in the Net Financing Requirement for the fiscal year 2022-23 between April and September (actually £72.4 billion, but near enough).

© DMO 2023
CIBUK.Org found the document in question – click image to read it

This figure was included in the Growth Plan published on 23rd September, so was not news. In short, this was the extra money that the DMO expected to have to raise from the bond markets in 2022-23, relative to the projections in April.

Crucially, most of this figure was accounted for by the additional government support to help people and businesses with their energy bills. It also included the reversal of the 1.25% hikes in National Insurance contributions for both employees and employers.

It is therefore misleading to describe the ‘£74 billion’ (or whatever) as a cost to the UK. The implication is that the UK is somehow ‘£74 billion’ worse off as a result of policies adopted to prevent an energy crisis from becoming a catastrophe. This is clearly nonsense. I wonder also if those gleefully still retweeting this are happy to rely on one iffy headline in the Express.

There is another, only slightly smaller, number doing the rounds: £65 billion

This is the notional amount that the Bank of England said it was willing to commit to buy UK government bonds (aka ‘gilts’) to stabilise the market in the wake of the mini-Budget.

In the event, though, the Bank ‘only’ spent about £19 billion, on which it actually made a profit of about £4 billion. Claims that the mini-Budget “wiped £65 billion off the British economy in a month” are therefore nonsense too.

The third ‘zombie statistic’ is the smallest: £30 billion

This one appears to be based on a report in the Observer (12th November) which claimed that ‘Liz Truss’s disastrous mini-budget cost the country a staggering £30 billion’.

© The Observer

The £30 billion figure came from an (old) analysis by the Resolution Foundation (RF).

Around £20 billion of the £30 billion was simply a (high) estimate of the cost to the Treasury of those tax cuts in the mini-budget that have survived. This is mainly accounted for by the reversal of the increases in National Insurance (NI) contributions, and partly by the reductions in Stamp Duty.

Ironically, these measures were widely welcomed at the time, in part because they made a deep recession less likely. It is certainly odd to characterise £20 billion of tax cuts as a cost to taxpayers! The remaining £10 billion was an (old) RF estimate of the annual increase in the government’s cost of borrowing that might be attributed to the fallout from the Truss premiership. This is just speculation. Indeed, most market commentators would agree with me that any significant risk premia in UK assets have long since evaporated.

Of course, some will argue that even if the £74/65/30 billion figures are wrong, the mini-Budget ‘wrecked the economy’ (it didn’t) and that we are still paying the price now (we aren’t).

One example of this dubious narrative is the many tweets which blame the mini-Budget for the sustained increase in mortgage interest rates. But mortgage rates (and mortgage spreads) have also surged in many other countries, notably the US.

Another is the attempt to pin the IMF’s recent downgrade of the UK’s growth forecast for 2023 on ‘the country’s disastrous autumn of Trussonomics, which came too late for the IMF’s October forecasts’. This interpretation makes little sense.

In its October World Economic Outlook, the IMF itself noted that the fiscal expansion in the mini-Budget was ‘expected to lift growth somewhat above the forecast in the near term’, albeit at the cost of complicating the fight against inflation.

Here, critics may respond that the reversal of policy in the UK was necessary to restore credibility in the financial markets after the botched implementation of Trussonomics, and that interest rates are still higher than they would otherwise have been.

However there is actually very little evidence to support this. In any event, it should have been sufficient for a new Chancellor to cancel the surprise measures that most unsettled investors – notably the additional cuts in personal taxes. Instead, the pendulum appears to have swung too far the other way.

History is often written by the victors. However, it is utterly bizarre to blame a forecast revision which is mainly due to tighter fiscal policy and expectations of still-high energy prices on a plan to cut taxes and provide more support with energy bills.

– By Julian Jessop, 09 Feb 2023