The 2022 growth plan – Assessing the implications

The 2022 growth plan
  • Market update
  • 3 minute read

The UK’s new Chancellor Kwasi Kwarteng has unveiled a new growth plan, designed to mitigate high energy prices and boost growth. However, these measures also come with a hefty price tag. Isabel Albarran, Investment Officer for Economics and Asset Allocation, reviews the measures and the likely implications for the economy.

What has been announced?

The government’s new growth plan includes three main components: energy price subsidies, tax cuts and economic reforms.

Energy subsidies are, financially, the largest share of the plan. Under the Energy Price Guarantee, the government has pledged to cap the average household energy bill at £2,500 for two years from October, a 27% rise on the current Ofgem price cap, versus the 80% rise planned under the original Ofgem formula. By keeping the £400 Energy Bills Support Scheme payment this winter, the net rise is even smaller initially, at 7%, followed by a 20% rise in the second year, if the payment is not repeated. Businesses and other non-domestic energy users will also see energy prices discounted by around 60% for six months, with further help expected for the most vulnerable customers. Under both schemes, the government will make up the difference in price to suppliers. The cost of this will depend on the path of energy prices, but early estimates are at £150bn over two years.

In terms of tax cuts, the Treasury cancelled the Health and Social Care levy payable by both workers and employers as of November, and immediately increased the stamp duty threshold to £250,000, and £425,000 for first-time buyers. From next April, income tax will be cut to 19%, and the 45% additional income tax rate will be abolished except in Scotland. The tax hike on dividend interest will be reversed and plans to raise corporation tax to 25% have also been cancelled, along with the rise in alcohol duty. In total, the tax measures are likely to equal £26.7bn of spending in the coming fiscal year, and around £44.8bn by the 2026/27 fiscal year.

The Treasury has also outlined measures designed to boost growth, including special investment zones, financial deregulation, and changes to the benefit system to incentivise people to return to the labour market. We don’t yet have the full details of these plans.

Will it help the economy?

Energy relief is likely to have the biggest impact on the economy. The cap will make UK energy prices more predictable, and will mean inflation peaks at a lower level and sooner than previously expected. Given that high inflation eroding real wage growth was expected to weigh heavily on GDP next year, this support should limit the hit and could even save the UK from recession. The other measures, assuming they are not offset by spending cuts in the Autumn Budget, should also be additive to GDP, though the scale of their impact will be much smaller.

What does this mean for monetary policy?

The rise in retail energy prices has been the main driver of UK inflation this year, so capping them will do a good deal to halt the rise in headline inflation. This initially puts less pressure on the Bank of England, but it could in fact mean more monetary tightening. This is because growth is now likely to slow by less, creating less spare capacity. Bank of England forecasts anticipated this spare capacity having a role in bringing inflation down to below 2% in 2024. Now, stronger growth could keep inflation higher for longer, necessitating more tightening.

What does this mean for UK assets?

The initial market reaction to this suite of policies has been negative, with sterling falling and gilt yields rising. A big suite of spending and tax cuts will help growth in the near term, but it will also raise government borrowing significantly. Raising government debt issuance by a third will logically weigh on prices, and the plans so-far make it likely that the government will breach its fiscal rule to have a falling debt ratio by the end of the parliament. While this rule can be changed, the Chancellor must take care to ensure debt sustainability does not become a concern.

The prospects for other UK assets are more favourable – the large cap UK equity index is usually boosted by periods of currency weakness, as a large share of earnings are overseas, but the slowing global outlook may lend less support to cyclically exposed sectors such as mining and banking. As ever, a globally diversified approach to portfolios mitigates some of these risks.

Important information

The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.


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