How a single fiscal statement triggered the largest U-turn in British economic history
In short: In September 2022, the UK government unveiled a radical growth plan relying on massive, debt-funded tax cuts. The market reaction was immediate and punishing, forcing a historic reversal that saw the Chancellor sacked and the Prime Minister resign within weeks. It remains a stark lesson in fiscal credibility and market sentiment.
On 23 September 2022, Chancellor Kwasi Kwarteng introduced a series of economic measures dubbed the mini-budget. Designed to stimulate growth through supply-side policies, the package included reversing a planned corporation tax hike, cutting income tax rates, and scrapping the Health and Social Care Levy. The government bypassed the Office for Budget Responsibility, refusing to provide independent forecasts for the £161 billion, five-year plan. This decision, combined with the scale of borrowing required, alarmed global markets and triggered a sharp decline in the pound sterling.
The fallout was swift. By 26 September, the pound hit an all-time low against the US dollar, dropping to $1.0327. Mortgage lenders began pulling products from the market, and interest rates on two-year fixed-rate home loans climbed above 6% for the first time since 2008. The Bank of England, which had not been briefed on the budget's contents, was forced to intervene as bond yields surged. Critics, including the International Monetary Fund, warned that the unfunded cuts would exacerbate inequality and risk financial instability.
Facing mounting pressure from MPs and financial markets, Prime Minister Liz Truss eventually dismissed Kwarteng on 14 October. His successor, Jeremy Hunt, systematically reversed nearly all the proposed tax cuts. The episode, which saw the UK's fiscal watchdog sidelined and the government's credibility shattered, culminated in Truss's resignation on 25 October. The Resolution Foundation later estimated that the turmoil cost the Treasury £30 billion, split between the direct cost of the measures and the subsequent rise in borrowing expenses.
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Sources
- Summary by Intellect · source: September 2022 United Kingdom mini-budget
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