New UK Chancellor Kwasi Kwarteng delivers first mini budget

The market reaction has been brutal

23 September 2022

Well, that didn’t go down well. New Chancellor Kwasi Kwarteng’s first mini budget saw him announce widespread tax cuts of an estimated GBP 45 billion, the biggest in decades as the Truss government gambles that this will translate into stronger growth. Ripping up so much of the previous Chancellor’s plans was perhaps unsurprising, given the change in overall government policy direction, but the political optics look alarming. Higher earners benefiting from larger tax cuts will not, as it never does, sit well with the lower earners. Income inequality is decisively not addressed in this budget and, with just two years for this “growth spurt” to materialise and lift all boats, it is the Tory party’s biggest gamble for re-election.

The market reaction has been brutal. The additional debt borrowing required to implicitly fund tax cuts has smashed gilt yields higher and prices a lot lower – the 5-year benchmark gilt yield registered an extreme outlier move, rising 45 bps on the day alone, and is now down 6% over the month making this much more expensive for the government to fund already with all the new gilt issuance that will be required. Sterling similarly took a beating, falling 1.7% against the US dollar. Inflationary headwinds continue and with this tax cut giveaway potentially only adding to inflationary concerns, it makes the Bank of England’s job even harder. The good news is that it at least retains its independence…for now.