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The 2022 Mini-Budget

Why the 2022 Mini-Budget Was Reversed

Explain why investors reacted so sharply to the 2022 mini-budget, how pension funds were forced to sell gilts, and what changed afterwards.

Before you start

What you'll be able to answer

  1. Why did investors react so sharply to the mini-budget?
  2. Why did falling gilt prices turn into forced selling by pension funds?
  3. What changed after the mini-budget?

Where this sits

The 2022 Mini-Budget · this module is lit

  1. 6 Sep 2022Liz Truss becomes Prime Minister, with Kwasi Kwarteng as Chancellor of the Exchequer, the minister for the Treasury
  2. 22 Sep 2022The Bank of England raises Bank Rate, its own interest rate, by half a percentage point
  3. 23 Sep 2022The Chancellor of the Exchequer announces the Growth Plan, soon called the mini-budget
  4. 26 Sep 2022The pound falls to about 1.07 dollars
  5. 28 Sep 2022The Bank of England starts buying long-dated gilts, government bonds not due to be repaid for many years
  6. 3 Oct 2022The government drops its plan to abolish the 45p top rate of income tax
  7. 14 Oct 2022Jeremy Hunt replaces Kwasi Kwarteng as Chancellor, and the planned rise in corporation tax, the tax on company profits, is kept
  8. 17 Oct 2022The new Chancellor reverses most of the remaining tax cuts
  9. 20 Oct 2022Liz Truss resigns
  10. 10 Sep 2024The Budget Responsibility Act receives Royal Assent

The Bank raised Bank Rate the day before the Chancellor cut taxes

On 22 September 2022 the Bank of England's Monetary Policy Committee, the group at the Bank that sets interest rates, raised Bank Rate, the Bank's own interest rate, to 2.25 per cent. In August consumer prices had been 9.9 per cent higher than a year before, and higher rates were meant to slow spending and so bring that inflation down. The next day the Chancellor announced tax cuts to be paid for by borrowing.

Predict first

Tax cuts paid for by borrowing leave people and firms more to spend. If the Bank wants spending to slow, what might it do next?

Markets came to expect a much higher Bank Rate

The tax cuts would leave households and firms more to spend, while the Bank was raising Bank Rate so that they would spend less. In the view of the Institute for Fiscal Studies (IFS), a research body, this left the government pulling in the opposite direction to the Bank. On Monday 26 September the Governor, Andrew Bailey, who heads the Bank, said the Committee "will not hesitate to change interest rates by as much as needed" to bring inflation back to its 2 per cent target.

Investors came to expect much higher rates. Just after the mini-budget, on the figures of the Office for Budget Responsibility (OBR), the official forecaster, markets put the peak in Bank Rate as high as 6.2 per cent. When investors expect a higher Bank Rate, they want a higher yield, the yearly return on the price paid, before they will hold gilts, the government's bonds.

The plan came with no OBR forecast and far more borrowing

The OBR had told the new Chancellor it could publish a forecast alongside any fiscal statement that month. On 7 September the Treasury, the government department for tax and spending, told the OBR that Kwasi Kwarteng would not ask for one. So the plan came with no independent view of how much the government would borrow, or whether its debt would keep rising.

The amount the government planned to raise by selling debt in 2022-23, including money to repay gilts falling due, went up from £161.7 billion to £234.1 billion: £62.4 billion more from selling gilts, the bonds through which it borrows, and £10 billion more from short-term Treasury bills. The IFS called the plan the biggest cut to the planned level of tax at any budget since 1972.