Before you start
What you'll be able to answer
- What did the mini-budget of 23 September 2022 announce?
- How did investors react, and what did the Bank of England do?
- How was the mini-budget undone?
Where this sits
The 2022 Mini-Budget · this module is lit
- 6 Sep 2022Liz Truss becomes Prime Minister, with Kwasi Kwarteng as Chancellor of the Exchequer, the minister for the Treasury
- 22 Sep 2022The Bank of England raises Bank Rate, its own interest rate, by half a percentage point
- 23 Sep 2022The Chancellor of the Exchequer announces the Growth Plan, soon called the mini-budget
- 26 Sep 2022The pound falls to about 1.07 dollars
- 28 Sep 2022The Bank of England starts buying long-dated gilts, government bonds not due to be repaid for many years
- 3 Oct 2022The government drops its plan to abolish the 45p top rate of income tax
- 14 Oct 2022Jeremy Hunt replaces Kwasi Kwarteng as Chancellor, and the planned rise in corporation tax, the tax on company profits, is kept
- 17 Oct 2022The new Chancellor reverses most of the remaining tax cuts
- 20 Oct 2022Liz Truss resigns
- 10 Sep 2024The Budget Responsibility Act receives Royal Assent
A new government set out its plans on 23 September 2022
Liz Truss became Prime Minister on 6 September 2022 and made Kwasi Kwarteng her Chancellor of the Exchequer, the minister in charge of the Treasury, the government department for tax and spending. On taking office she promised to "cut taxes to reward hard work and boost business-led growth and investment". Two days later the government announced help with energy bills. On Friday 23 September Kwarteng set out what he called the Growth Plan. It was soon known as the mini-budget, a name Truss herself used.
The Treasury put a price on the plan's tax cuts. By 2026-27, roughly how much a year did it expect them to cost?
About £45 billion a year, on the Treasury's own costing. The next section says what was cut.
The Growth Plan listed tax cuts for people and for firms
The plan called growth the government's central economic mission, aiming at 2.5 per cent long-run growth. The 45p top rate of income tax was to go. The basic rate, which most taxpayers pay, was to fall by a penny, to 19p, in April 2023. The 1.25 percentage point rise in National Insurance, a tax on earnings, made earlier in 2022 was to be reversed. Stamp duty on home buying was cut, and a planned rise in corporation tax, the tax on company profits, was cancelled.
On the Treasury's costing the tax cuts would cost about £45 billion a year by 2026-27, and the help with energy bills, planned to cap household bills for two years, about £60 billion in its first six months. No spending cuts were set out to pay for them, and no forecast from the Office for Budget Responsibility (OBR), the official forecaster, came with the plan.
Check yourself
Which of the plan's tax cuts would reach the most people?
The government planned to pay for all this by borrowing: selling more gilts, the bonds on which it pays a fixed interest. If buyers grow wary, what happens to the interest rate it must offer?
It rises. Wary buyers pay less for each gilt, and because a gilt's interest payments are fixed, a lower price means a higher return on the money paid. The next section shows how far it went.
The pound and gilt prices fell after the announcement
The government would pay for the plan by borrowing more, through extra sales of gilts. Investors sold the pound and gilts instead. On Monday 26 September the pound fell to about 1.07 dollars, its lowest point after the mini-budget and, on the OBR's account, the lowest since 1985. When a gilt's price falls, its yield, the yearly return on the price paid, rises, and new borrowing costs the government more.
The chart shows the yield on 20-year gilts each working day. It rose from about 3.7 per cent on 22 September, the day before the mini-budget, to about 4.7 per cent three working days later.
Source: Bank of England Database, 20-year nominal par yield (IUDLNPY). Open Government Licence v3.0.
From 28 September the Bank of England bought gilts
Funds that many pension schemes use, called liability-driven investment (LDI) funds, had bought gilts partly with borrowed money. As gilt prices fell they were forced to sell gilts, which pushed prices down further. The Bank of England warned that if this went on it would be a material risk to the UK's financial system.
The Bank was raising interest rates to bring down inflation, the rise in prices, and was about to start selling gilts it had bought in earlier years. From 28 September it bought long-dated gilts, those not due to be repaid for many years, instead, offering at first up to £5 billion a day, until 14 October, with the Treasury bearing any loss. Buying gilts pushes their price up and their yield down. The Bank bought £19.3 billion of gilts in all, and had sold them all back by 12 January 2023.
Check yourself
Look at the chart. What did the 20-year yield do in the two weeks after 28 September?
Check yourself
The Bank said its purchases would stop on 14 October. Why set an end date, instead of buying until gilt prices recovered?
Which one of these Growth Plan tax cuts do you think survived?
The stamp duty cut survived, and so did the National Insurance cut; the alcohol duty freeze and the basic-rate cut were dropped on 17 October. The next section says what went, and when.
October brought a new Chancellor and a run of reversals
On 3 October Kwarteng dropped the plan to abolish the top rate. On the day the Bank's purchases ended, Truss replaced him as Chancellor with Jeremy Hunt. She said parts of the mini-budget had gone "further and faster than markets were expecting", and kept the planned rise to 25 per cent in corporation tax, worth about £18 billion a year. On 17 October Hunt reversed almost all the tax cuts not yet passed into law, including the basic-rate cut, and limited the help with energy bills to April 2023, with a review of what would follow.
On the Treasury's estimate, the reversals announced by then, including the corporation tax and top-rate decisions, were together worth about £32 billion a year, in the same year as the original costing.
Check yourself
Work from two figures above: tax cuts costing about £45 billion a year by 2026-27, and all the reversals announced by 17 October, including the corporation tax decision, worth about £32 billion a year together. Roughly what percentage of the tax cuts had been reversed?
71 %
About 70 per cent: 32 divided by 45 is about 0.71. The IFS called it more than two-thirds of the original package.
Markets calmed, and a new Prime Minister took office
By 3 October, on the OBR's account, the pound was back near its level before the mini-budget, and later in the month gilt yields fell back. The cuts in National Insurance and stamp duty survived, as did the £1 million yearly tax allowance for business investment.
Three days after Hunt's reversals, Truss announced her resignation, saying she could not deliver the mandate, the programme the Conservative Party had elected her to carry out. Rishi Sunak replaced her as Prime Minister on 25 October, saying some mistakes had been made. Why did investors react so sharply to the mini-budget, and what changed afterwards? The next module takes it up.
Check yourself
The key questions
What did the mini-budget of 23 September 2022 announce?
Tax cuts for people and firms, including abolishing the 45p top rate and cancelling the planned rise in corporation tax, on top of help with energy bills, all to be paid for by borrowing.
How did investors react, and what did the Bank of England do?
They sold the pound and gilts: the pound fell and the cost of government borrowing jumped. With pension funds forced to sell gilts, the Bank of England bought long-dated gilts for a set time, from 28 September to 14 October.
How was the mini-budget undone?
In steps over October: the top-rate cut was dropped first, then the planned rise in corporation tax was kept when Jeremy Hunt replaced Kwasi Kwarteng as Chancellor, then most of the rest went. Liz Truss then resigned, and Rishi Sunak became Prime Minister.
The numbers
Check yourself
Which of these describes the Growth Plan's package as a whole?
Check yourself
Suppose the Bank of England had not bought gilts from 28 September. What would most likely have followed?
Check yourself
Which single reversal took back the largest slice of the planned tax cuts?