When is a budget a budget?

By Jake Rickman​

What do you need to know this week?

Under the leadership of Liz Truss’s government, Chancellor of the Exchequer Kwasi Kwarteng announced on Friday a sweeping reform of the UK’s fiscal policy in what the government calls its “mini-budget”.

Analysts at the Institute for Fiscal Studies estimate the budget will cost upwards of £110bn after the cost of borrowing is factored in.

Below is a summary of the key reforms:

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Why is this important for your interviews?

To call Kwarteng’s fiscal reforms controversial is an understatement. Market players expected the announcement to detail the government’s plans to subsidise energy costs for consumers and businesses. They did not expect the government to embark upon the most aggressive tax reform since 1972.

The accompanying article in this week’s newsletter on the plummeting price of GBP partially explains why many market investors find the substance of the “mini-budget” controversial, but one factor explaining the reaction is the manner in which the “mini-budget” was announced.

The repeated use of inverted commas is intentional because, as a fund manager from Polar Capital, George Godber, discussed on the BBC’s daily podcast Wake Up to Money, there is nothing budgetary about the announcement. A proper budget announcement in the UK is a formal affair where the government’s fiscal proposals are scrutinised by the Office of Budget Responsibility (OBR), which is an independent public authority that examines the sustainability of the public finances. The Chancellor appears before Parliament with a red box to announce the budget and give MPs the opportunity to review the numbers and vote accordingly.

Kwarteng’s announcement contained none of this (nor did he have a red box). Importantly, the OBR has not reviewed these proposals. Many believe the government is essentially going in blind without due consideration of the possible consequences of the budget.

Some commentators liken it to the budget announced in 1971 under then-Chancellor Anthony Barber, which, following the miserable economic decade that followed, became euphemistically known as the “Barber boom”. Barber’s budget aggressively cut taxes with little regard for the inflationary pressures brewing at the time. While the initial outcome was an increase in economic growth, the bottom ultimately fell out. Britain plunged into a decade of economic hardship, earning the country the moniker “the sick man of Europe”.

This tracks closely to today’s economic woes, as this government’s pseudo-budget amounts to fiscal expansion (i.e., tax cuts) while the independent Bank of England is (with increasing aggression) raising interest rates and ending its bond repurchase programme (“quantitative easing”).

How is this topic relevant to law firms?

At the risk of sounding the alarm, if the government has bet on the wrong horse, this budget could prove disastrous to the nation’s economy. Domestic productivity may stall as the cost of importing goods rises. If this has a substantial impact on the UK economy, this would in turn hit law firms’ revenue figures.