BRIEFING

Blowing the budget
Assessing the implications of theSeptember 2022 fiscal statement
Torsten Bell, Molly Broome, Nye Cominetti, Adam Corlett, Emily Fry,
Karl Handscomb, Lindsay Judge, Jack Leslie, Louise Murphy, Krishan Shah, Hannah Slaughter,James Smith, Gregory Thwaites & Lalitha Try
September 2022

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Blowing the budget | Assessing the implications of the September 2022 fiscal statement2

Summary
Yesterday, the Chancellor decided to blow the budget on a £45 billion package of tax
cuts, the biggest for 50 years. In doing so, he rejected not just Treasury orthodoxy but
also the legacy of Boris Johnson, unveiling a wholly new approach to economic policy.
Today’s Conservative Party is no longer fiscally conservative or courting the Red Wall, withdebt on course to rise in every year of the forecast, and its focus shifting to the South ofEngland, where the beneficiaries of these tax cuts are more likely to be living.

Large discretionary, deficit-financed, tax cuts are being loaded on top of analready large, but largely unavoidable, borrowing surge
Major tax cuts have been combined with an already large, and largely unavoidable, fiscalloosening, driven by a weaker economy and the need to subsidise families’ and firms’
surging energy bills. The Chancellor has – unwisely – not allowed the Office for Budget
Responsibility (OBR) to update its forecasts, but we estimate that energy support and theweaker economic outlook will increase borrowing by £265 billion over the next five years
compared to the OBR’s March forecast. Tax cuts of £146 billion over the same period
increase that to £411 billion.
The extra borrowing is greatest this year (£130 billion), driven by the energy bill support,
but the permanence of the new tax cuts, combined with higher interest rates and weaker
growth, mean that the £30 billion of headroom that the previous Chancellor maintained
against his fiscal rule of having debt falling as a share of GDP will have been blown
through twice over by the middle of this decade. This constitutes the largest permanent
loosening of fiscal policy on record: the deficit will increase by 2.3 percentage points ofGDP, or £67 billion, in 2026-27 compared to expectations in March.
The Chancellor set out that having debt falling as a share of GDP remains his key metricfor fiscal sustainability, but he did not outline how that would be achieved. Doing so by
the middle of this decade would require spending cuts of £36 billion in 2026-27, assuming
tax rises have been ruled out. This would be broadly equivalent to the total cut to public
spending announced by George Osborne in his 2010 Budget. Faster growth would
reduce the spending reductions required, but pushing the other way are a range of fiscalpressures, including the Prime Minister’s commitment to spend 3 per cent of GDP on
defence (at a cost of £30 billion), and the general tendency not to proceed with inflationlinked rises in fuel duty (which could cost £4 billion by 2026-27).

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New tax cuts will overwhelmingly benefit those on the highest incomes in theSouth of England, while personal taxes are still being increased for the vast
majority of earners
The tax cuts confirmed yesterday are strongly focused on higher-income households,
driven by the reversal of the rise in National Insurance and the scrapping of theadditional 45p rate of Income Tax, along with associated cuts to Dividend Tax. Next year
they will see someone earning £200,000 gain £5,220 a year, with the gain rising to £55,220
for a £1 million earner. Those on £20,000 will gain just £157. The result is that almost half
(47 per cent) of the gains will go to the richest 5 per cent of households, compared to 12
per cent for the entire poorer half. Moreover, those living in the South East or London will
see over three-times (on average, £1,600) the gains of those in the North East, Wales andYorkshire (an average of £500). The South is also where the main impact of a welcome
cut to Stamp Duty will be felt: the tax bill on the sale of the average first-time buyer homein London will fall by £6,300, compared to no gain for the average first-time buyer in the
North East.
This package of tax cuts largely reverses rises announced by Rishi Sunak in recent years,
but does not do so entirely: the four-year freeze to income tax thresholds remains inplace. The scale of that freeze in an era of high inflation means that the vast majorityof earners will still see their personal taxes increased when all tax changes announced
during this Parliament are taken into account. Those earning under £155,000 will see theirtax bill increase or be unaffected, with only those earning over £155,000 will receive a net
tax cut thanks to the scrapping of the 45p tax rate. Workers earning between £63,000 and£125,000 lose the most (almost £1,500 in 2025-26). A similar pattern can be seen amonghouseholds, even considering increases to benefit generosity as well: only the top 5 percent will see significant income gains from policy changes (averaging £2,520 by 202526). Despite the rhetoric, tax as a share of the economy remains at its highest sustainedlevel since the 1940s (at around 35 per cent of GDP).

The Chancellor’s borrowing surge will boost growth in the short term, but raiseinterest rates
The Chancellor rightly identified raising the UK’s growth rate as a core objective for
economic policy makers. In the short run, the sheer scale of additional fiscal support
to the economy will boost GDP: the £60 billion of energy bill support over the next six
months could raise the level of GDP by roughly 1.5 per cent. But while the Government
has its foot on the accelerator, the Bank of England has its foot firmly on the brake,
given its view that demand in the UK economy currently outstrips supply. As a result,
the Chancellor’s short-term boost to growth will be offset by further interest rate rises,leaving the level of GDP largely unaffected in the medium term. Ten-year gilt yields rose
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Blowing the budget | Assessing the implications of the September 2022 fiscal statement4

by around 25-30 basis points on the day of the fiscal statement, with larger rises for
shorter-term yields.
As a result, any lasting impact of the new tax cut package rests not on its ability toboost demand in the short run, but on whether it contributes to permanently growing
the economy’s supply potential. Gambling that it will do is the new central economic
policy of the Government, and a key driver of the decision to scrap the rise in the rate ofCorporation Tax (CT) from 19 per cent to 25 per cent planned for April 2023 (costing £18
billion a year). However, there are good reasons for being cautious that this will materiallyboost the economy. First, this change will leave the effective CT rate exactly where it
has been during the past decade of low growth that the Chancellor is seeking to make abreak from. Second, while in principle lower CT rates may boost growth by encouraging
investment and innovation, in practice empirical studies find little evidence of a material
impact on growth. Specific tax measures, including more ambitious Investment Zones,
could contribute to growth, but crucial details about where they will be based and whatregulatory changes they will involve remain unclear. More generally the level of growth,or depth of any recession, in the years ahead will be driven far more by the path of energy
prices than the level of taxation, with countries that opted for both higher (Germany) andlower (US) tax levels outgrowing the UK economy over the past 15 years.

The outlook for household living standards has been boosted by energy billsupport and tax cuts, but remains direAs with growth, large tax cuts and support for energy bills will boost household incomes,
but they are still on course for a dreadful few years. Non-pensioner incomes are projected
to fall by 8 per cent over the course of this year and next, significantly more than during
the financial crisis (5 per cent between 2009-10 and 2011-12). Even assuming that benefits
are increased by 10 per cent in cash terms next April (as per the usual uprating rules, andas promised by a previous Chancellor and a previous Secretary of State for Work andPensions), the proportion of people living in absolute poverty is projected to rise from 17
to 20 per cent (equivalent to an extra 2.3 million people) between 2021-22 and 2023-24,
with the proportion of children jumping from 23 to 28 per cent (an extra 700,000 children).
While lower-income households have seen their incomes relatively protected this year,
they are on course for a remarkably large income fall in 2023-24 (an 8 per cent decline)
while only the top 5 per cent are projected to see income gains (2 per cent growth),
thanks to the cuts to income taxes. These falls are driven by inflation continuing tooutstrip wage growth, while a slow recovery of living standards through to the middle ofthis decade also reflects rising unemployment (the Bank of England project a rise to 6.3

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per cent) and rapidly rising mortgage costs. Incomes are projected to be lower in 2024-25
than 2019-20, making this comfortably the worst parliament on record for living standards
growth.

Orthodox this is not
Rising energy costs, surging interest rates and the aftermath of the pandemic mean thatthe early 2020s were already set to be a perilous time for households and a challenging
one for economic policy makers. That is the backdrop to the Government’s radical
reshaping of economic policy yesterday, where it jettisoned fiscal conservatism to deliver
the largest tax cuts in half a century. The Chancellor has set the UK economy on a new
trajectory, one he hopes includes permanently higher growth but which will certainly
involve far higher borrowing levels and costs. The degree of risk-taking is beyond that
adopted by any Chancellor in generations. Orthodox it is not.

Liz Truss’s Government has cancelled key planned tax rises which,along with other cuts, amounts to a £45 billion a year giveaway
It may not have been an official Budget, but the Chancellor’s fiscal statement last Friday
was nonetheless a very a big deal. The Government went beyond promises made by
the Prime Minister in the leadership campaign, and cancelled key planned tax rises, cut
various other taxes, and funded the energy package for households and firms. The newtax measures include:• Fully reversing the National Insurance Contributions (NICs) rate rise introduced
this April, with NICs rates set to fall by 1.25 percentage points in November forboth employees and employers, and the equivalent ‘Health and Social Care Levy’(HSCL) for 2023-24 and beyond abolished. The combined cost of these measures is
estimated to be over £15 billion in 2026-27.
• Cutting the basic rate of Income Tax by 1 percentage point to 19 per cent in 2023-24,
one year earlier than had previously been announced by Rishi Sunak when he was
Chancellor, equivalent to a giveaway of £5 billion in 2023-24.
• Removing the top rate of Income Tax for the highest earners, at a cost of £2 billion ayear by 2026-27. This will apply to taxpayers in England, Wales and Northern Ireland;
rates are devolved in Scotland.
• Reversing the 1.25 percentage point increase in Dividend Tax in April 2023 which,along with other, more minor, changes to the tax, will reduce revenues by £1 billion
in 2026-27.

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Blowing the budget | Assessing the implications of the September 2022 fiscal statement6• Extending the Stamp Duty Land Tax (SDLT) zero band for both movers and first-timebuyers in England and Northern Ireland – to £250,000 and £425,000 respectively.
This measure will cost the Treasury £1.6 billion a year by 2026-27.
• Cancelling the planned rise in the main rate of Corporation Tax, which wasscheduled to go up from 19 to 25 per cent next April, costing over £18 billion in 202627.
• Repealing reforms to off-payroll working (IR35) by April 2023, which will result in
more workers being classed as self-employed, and tax revenues that are lower by £2billion a year by 2026-27.
As Figure 1 shows, the impact of these and other smaller changes announced at the
fiscal statement look set to reduce the Government’s tax take by around £45 billion in
2026-27 – a permanent reduction of around 1.5 per cent of GDP.
FIGURE 1: The Chancellor’s fiscal statement amounts to a £45 billion tax
giveaway
Fiscal impact of polices announced in September 2022: UK+£20bn+£10bnOther
Energy Profits Levy

£0

Energy Bills Support Scheme change
Stamp Duty cut-£10bnCorporation Tax changes-£20bnOff-payroll working U-turn
Additional rate of IT abolition-£30bnBasic rate IT cut brought forward
HSCL cancellation-£40bnNet total-£50bn202223202324202425202526202627NOTES: IT = Income Tax. HSCL = Health & Social Care Levy (and National Insurance changes in 2022-23).
SOURCE: HM Treasury, The Growth Plan 2022.

Figure 2 puts the scale of that giveaway into a historical perspective: this is the biggest
single package of tax cuts seen at any fiscal event in the past 50 years, since Antony
Barber’s ill-fated Budget in 1972.

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FIGURE 2: This was the largest set of tax cuts announced at a fiscal event since
the Budget of 1972
Net long-term annual impact of tax policy announcements at each fiscal event,2026-27 nominal GDP terms: UK

NOTES: Based on forecasts from the time of each fiscal event (actual impacts on tax revenue may havediffered).
SOURCE: RF analysis of OBR, Policy measures database; HM Treasury, The Growth Plan 2022.

These huge tax cuts mean that revenues as a share of the economy are set to be much
lower in the future than they were projected to be in the Office for Budget Responsibility’s(OBR) last forecast in March. But they are on course to remain significantly higher thanpre-pandemic, rising from 33 per cent of GDP in 2019-20 to around 35 per cent in 202223 and beyond. This would be the highest sustained rate since the 1940s (see Figure 3).
Moreover, these figures are likely to be at the conservative end of the spectrum, as ourforecast does not account for changes in the economic outlook, which may include asmaller economy in future but higher-than-expected tax receipts (before accounting
for new policies), due to (for example) higher-than-expected employee earnings growth
combined with the significant freeze in Income Tax thresholds.

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FIGURE 3: Despite the tax cuts in the fiscal statement, the tax share is still set
to rise to its highest level since the 1940s
39%

National accounts taxes as a proportion of GDP: UK

37%

OBR (March 2022)

35%
33%With adjustment
for tax policy
decisions

31%
29%
27%

25%
1948- 1953- 1958- 1963- 1968- 1973- 1978- 1983- 1988- 1993- 1998- 2003- 2008- 2013- 2018- 202349
54
59
64
69
74
79
84
89
94
99
04
09
14
19
24

NOTES: Green line does not account for economic forecast changes since March 2022.
SOURCE: RF analysis of OBR, Public finances databank; HM Treasury, The Growth Plan 2022.

The highest-income households are the biggest winners from the
Chancellor’s changes to personal taxation
Personal taxation loomed large in the Chancellor’s fiscal statement: £20 billion (or 45 percent) of the £44 billion of tax cuts will be delivered to people via changes to Income Tax,
NICs, Dividend Tax and Stamp Duty Land Tax (SDLT). But as Figure 4 makes plain, it ishigher-income households that are set to gain the most from these newly announced tax
measures. Two-thirds (66 per cent) of the gains from the personal tax cuts confirmed at
the fiscal statement go to the richest one-fifth of households; in cash terms, this equates
to being better off by £3,250 (an income increase of just 3.8 per cent) next year as aresult. 1 In contrast, just 12 per cent of the gains will go to the poorest half of households,
who will benefit on average by just £230 (a 0.6 per cent income increase) next year. But
most striking are the gains that accrue to the top 5 per cent of households. They look
set to receive almost half (47 per cent) of the value of the personal tax giveaways the
Chancellor announced at the fiscal statement, equivalent, on average, to a £9,190 gain, on
average, or a 5.5 per cent boost to their incomes.

1

In estimating the cost of the tax cuts announced at the fiscal statement, we do not model behavioural responses to changes intax rates. In addition, under-coverage of top earners in the survey data used in our analysis (a known limitation) may affect ourestimates of the cost of tax cuts affecting higher-income households.

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FIGURE 4: High-income households disproportionately gain from personal tax
changes confirmed at the fiscal statement
Impact of personal tax polices announced in September 2022, by equivalised householdincome vigintile, after housing costs, in 2022-23 prices: UK, 2023-24£10,000

Dividend Tax cuts

£9,000Abolishing the additional rate of Income Tax£8,000

Reducing the basic rate of Income Tax by 1%£7,000Abolishing the Health and Social Care Levy

£6,000£5,000£4,000£3,000£2,000£1,000£0

1

2

3Poorer

4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
← Net equivalised household income vigintile, after housing costs → Richer

19

20

NOTES: Dividend tax cuts modelled are both the reversal of the 1.25 percentage point increase in dividend
taxes and the removal of the additional rate of dividend tax.
SOURCE: RF analysis of DWP, Family Resources Survey using the IPPR Tax-Benefit Model.

Looking at the impact of the personal taxation changes by an individual’s gross earnings,
as we do in Figure 5, drives home the point. In the round, the effect of the 1p cut in basic
rate of income tax (worth £377 to all higher-rate taxpayers), the abolition of the 45p
additional rate of Income Tax, and the abolition of the planned Health and Social Care
Levy leaves someone earning £200,000 a year £5,220 better off in 2023-24 than theywould have been absent the Chancellor’s announcements, while those earning £20,000
a year will gain just £157. A person earning an exceptionally high £1 million a year will be£55,220 better-off, far more than the average household income.2
Moreover, the benefits will not be evenly spread across regions of the UK. As Figure 6
shows, the average gain for households in the South East in 2023-24 will be £1,670, with
£690 of this increase coming from the scrapping of the additional rate of income tax. In
contrast, households in the North East are least likely to benefit from the upcoming tax
changes, with the average household gain being £470. This is largely due to the higher
concentration of higher-rate tax payers in the South. Moreover, the regional impact of thestamp duty cuts follows a similar pattern, as discussed in more detail in Box 1.

2 In 2022-23, an estimated 27,000 individuals had a taxable income of £1 million or more. See: HMRC, Table 2.5 Income Tax liabilities
by income range, June 2022.
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FIGURE 5: Newly confirmed tax changes are a huge giveaway to the very
highest earners
Annual individual income changes as a result of personal tax policies announced in
September 2022, by gross earnings: 2023-24£100k

Abolishing the employee Health and Social Care Levy

£90k

Basic rate Income Tax 1p cut£80k

Abolishing 45p rate of Income Tax£70k

Total effect

£60k
£50k
£40k
£30k
£20k
£10k
£0

£0

£0.2m

£0.4m

£0.6m

£0.8m
Gross earnings

£1.0m

£1.2m

£1.4m

£1.6m

NOTES: Assumes no pension contributions.
SOURCE: RF Case Study model.

FIGURE 6: Households in London and the South East are set to gain the mostfrom the tax policies taking effect in the winter and spring
Impact of personal tax policies announced in September 2022 by region, in 2022-23
prices: UK, 2023-24£1,800£1,600£1,400£1,200£1,000

Dividend Tax cuts
Abolishing the additional rate of Income Tax
Reducing the basic rate of Income Tax by 1%
Abolishing the Health and Social Care Levy

£800
£600
£400
£200
£0

North
East

Wales

Yorkshire Northern
East
Ireland Midlands

North
West

Scotland

South
West

West
East of
Midlands England

LondonSouth
East

SOURCE: RF analysis of DWP, Family Resources Survey using the IPPR Tax-Benefit Model.
NOTES: Income Tax rates are devolved in Scotland. The Scottish Government has not announced whether
it will follow the cuts announced by the Chancellor this week, but they will receive an increase to the block
grant to reflect these changes. We have assumed that similar tax cuts will apply in Scotland in 2023-24.

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BOX 1: Who benefits from the stamp duty cuts?
The Chancellor announced anothermuch-heralded tax cut in his fiscal
statement on Friday: an extension of
the Stamp Duty Land Tax (SDLT) zeroband for both movers and first-timebuyers – to £250,000 and £425,000
respectively – and an increase in the
maximum value of a property a firsttime buyer can purchase while being
taxed more leniently than a mover to£625,000.3

significant price tag, though, of £1.6
billion by 2025-26 and, as Figure 7
shows, the savings that a family buying
the average-priced home in eachregion of England look set to makeare not evenly spread. On average, apurchaser in London will save £2,500,
over three-times more than the £800
savings made by a family buying the
average-priced property in the North
East. But the differences are most stark
when considering first-time buyers: thetypical first-time buyer in Inner London
will see a reduction in stamp duty ofover £6,300 compared to no benefit for
the average first-time buyer purchasing
outside of London and the South East.

Reducing the impact that Stamp
Duty has in discouraging propertytransactions is very welcome, andshould bring both economic andwellbeing benefits. Those come at a

FIGURE 7: The stamp duty changes disproportionately benefit those buying
homes in the most expensive parts of the country
Average stamp duty savings resulting from changes announced in September 2022, byregion of England
Inner London£2.5k

London£2.5kOuter London£2.5kSouth East

£2.5k

£0.7k

South West

£0.0k

Wes Midlands£0.0k

East of England£0.0k

England£0.0k

East Midlands£0.0k

North West

£0.0k

Yorkshire and The Humber£0.0k

North East

£0.8k
£0.0k

£0k

£11.3k
£6.3k
£5.6k

£2.5k
£2.5k
£2.5k
£2.5k
£2.5k
£1.8k

Main residence (mover)£1.7k

Main residence (first-time buyer)
£1k

£2k

£3k

£4k

£5k

£6k

£7k

£8k

£9k

£10k

£11k

SOURCE: RF analysis of Stamp Duty Land Tax rates 22/9/22 and 23/9/22; ONS, House Price Index.
3

These changes apply to England and Northern Ireland only; Scotland and Wales have their own transaction taxes.

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Figure 8 brings home the point that it
is first-time buyers purchasing highervalue properties who are the biggest
beneficiaries of the Chancellor’s stamp
duty changes. But the much-hoped-for
effect on home ownership rates could
be muted, but not eliminated, if thesesavings are substantially capitalised
into the house price. There is someprecedent for this: an HMRC evaluation

12of the stamp duty cut introduced forfirst-time buyers in the wake of thefinancial crisis estimated, for example,
that between 50 and 70 per cent of
the value fed through into higher
house prices4, and the SDLT holiday
announced during the pandemic period
clearly stoked demand (although otherfactors were also at play).5

FIGURE 8: First-time buyers purchasing higher-value properties look set to
enjoy the biggest savings as a result of the cut in stamp duty
Stamp duty savings as a share of house price paid resulting from changes announced
in September 2022: England
2.5%

Main residence (mover)Main residence (first-time buyer)

2.0%

1.5%

1.0%

0.5%

0.0%
£50k

£125k

£200k

£275k

£350k

£425k

£500k

£575k

£650k

£725k

£800k

£875k

£950k

SOURCE: RF analysis of Stamp Duty Land Tax rates 22/9/22 and 23/9/22. See gov.uk for more details.

Although the fiscal statement undid most of Rishi Sunak’s
programme, the four-year freeze to income tax thresholds remains
As Table 1 shows, the package of tax cuts announced at the fiscal statement largely
reverses rises announced by Rishi Sunak in recent years, but not entirely, given thatthe four-year freeze to income tax thresholds remains in place. Had the new Chancellorgone all the way in reversing his predecessor’s tax rises, the Personal Tax Allowance and4
5

A Bolster, Evaluating the Impact of Stamp Duty Land Tax First Time Buyer’s Relief, HMRC, November 2011.
L Judge, F Odamtten & K Shah, Housing Outlook Q3 2021, Resolution Foundation, August 2021.

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the higher-rate threshold would have increased by around 10 per cent (in line with thisSeptember’s expected CPI figure) next April.
TABLE 1: In the past 30 months, the Government has announced seven major
personal tax and benefit changes
PolicyFour-year Income Tax thresholds freeze
Health and Social Care Levy introduced
Universal Credit taper cut
National Insurance threshold increase
Health and Social Care Levy abolished
Basic rate of Income Tax cut by 1p
Additional rate (45p) of Income Tax abolished

Announced
March 2021
September 2021
October 2021
March 2022
September 2022
September 2022
September 2022

Implemented
April 2022 to April 2025
April 2022
December 2021
July 2022
November 2022
April 2023
April 2023

NOTES: As well as introducing (and abolishing) the Health and Social Care Levy, the Government also
introduced (and abolished) a temporary 1.25 percentage point rise to National Insurance rates for the2022/23 financial year. This will be reversed from November 2022. Similarly, when introducing the Healthand Social Care Levy, the Government increased dividend tax rates by 1.25 percentage points. Whenscrapping the Health and Social Care Levy, this increase to dividend tax was reversed. When abolishing theadditional rate of Income Tax, the additional rate of dividend tax was also abolished. The 1p cut to the basic
rate of Income Tax was initially announced in March 2022 to come into effect in April 2024.

Retaining this one tax rise, however, means that the vast majority of earners still look
set to see their tax bill rise as a result of all personal tax changes announced during thisParliament. Most materially, the freeze to the Income Tax thresholds in April next year willcompletely offset the gains from this week’s announcement for all but the richest 20 per
cent of households, leaving the households in the middle-fifth of the income distribution
worse off by £123 on average in 2023-24 (-0.3 per cent) overall. It is only the richest 20 per
cent of households who will see net tax cuts in 2023-24 – by £1,920 (2.3 per cent); for the
top 5 per cent, this increase will be £7,500 (4.5 per cent).
Of course, Income Tax thresholds were frozen over four years, from April 2022 to April
2025, and not just for this coming April. If we turn to the impact of all tax and benefit
policy changes announced this Parliament, as shown in Figure 9, the ongoing effect of
the freeze means that middle- to-high income households from the 6th to 19th vigintile
will be worse off by 2025-26 when all changes have taken effect.

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FIGURE 9: Tax and benefit policy changes over the Parliament are dominatedby the huge impact of freezing Income Tax thresholds for four years
Impact of tax and benefit policies announced this Parliament by equivalised householdincome vigintile, after housing costs, in 2022-23 prices: UK, 2025-26£8,000Abolishing the additional rate of Dividend Tax
Abolishing the additional rate of Income Tax£6,0004 years of Income Tax threshold freeze
Taper rate and work allowance changes£4,000

Reducing the basic rate of Income Tax by 1%
National Insurance threshold increase£2,000Combined impact of all changes£0-£2,000-£4,000-£6,000

1

2

3
Poorer

4
←

5
6
7
8
9
10
11
12
13
14
15
16
17
18
Net equivalised household income vigintile, after housing costs → Richer

19

20

SOURCE: RF analysis of DWP, Family Resources Survey using the IPPR Tax-Benefit Model.

The poorest one-fifth of households are very slightly better off (by £90 in 2025-26 or 0.7
per cent) due to the cut to the Universal Credit (UC) withdrawal rate (the rate at which
UC is withdrawn as post-tax family earnings rise). But, in contrast to the rest of the
population, policy changes (the abolishment of the HSCL and the 45p additional rate)
leave the richest 5 per cent of households significantly better off (on average by £2,520 or
1.5 per cent).
Finally, Figure 10 shows how each of the tax changes stack up at the individual level. To
begin, the four-year freeze to Income Tax thresholds leaves all Income Tax payers worse
off (the effect is smaller for those earning over £125,000 because such people do notbenefit from the Personal Allowance anyway). Taken together, all workers earning lessthan £155,000 will be worse-off or unaffected by the package of tax changes announced
over the Parliament, with workers earning between £63,000 and £125,000 losing the most– almost £1,500 – in 2025-26. In contrast, those earning over £155,000 will be better off,
driven very much by the scrapping of the additional rate of Income Tax.

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FIGURE 10: From 2025-26, only those earning above £155,000 will be better off
from this Parliament’s changes to personal taxes
Annual individual income changes as a result of permanent personal tax changes thisParliament: 2025-26£3,000Four-year freeze to Income Tax thresholds
National Insurance threshold increase
Basic rate Income Tax 1p cut
Abolishing 45p rate of Income Tax
Total effect of tax changes£2,000£1,000£0-£1,000-£2,000-£3,000

£0

£20k

£40k

£60k

£80k

£100k
£120k
Gross earnings

£140k

£160k

£180k

£200k

NOTES: Assumes no pension contributions.
SOURCE: RF Case Study model.

Huge deficit-financed tax cuts are especially surprising given largely
unavoidable higher borrowing
What makes the Government’s decision to proceed with large, discretionary, permanentand deficit- financed tax cuts so unusual is the context: an already large, and largely
unavoidable, fiscal loosening driven by a weaker economy and the need to subsidise
surging energy bills of families and firms. The absence of an official forecast from theOBR unfortunately means that this has not been spelt out (although the Chancellor’s
commissioning of new forecasts for later this autumn is welcome). Below, we provide anassessment of the fiscal outlook.

Higher inflation and interest rates mean the outlook for the public finances has
deteriorated
High inflation has led to a large rise in expected borrowing in the near term, but also amoderate increase in the medium term, driven by a worsened economic outlook (seeFigure 11). Back in March, the OBR had expected annual CPI inflation to peak at 8.7 per
cent, but it is now set to peak at around 11 per cent. In the short term, higher inflation

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raises government spending by increasing debt interest payments on index-linked gilts,6but, in the medium term, there are additional and partially offsetting effects from higher
tax revenues on the one hand, and higher welfare and pension expenditure on the other.7
To combat inflation, central banks around the world have been raising interest rates;
this increases the cost of issuing new, or rolling over existing, government debt, thereby
increasing public sector debt interest costs and contributing to a rise in borrowing in themedium term. Taken together, as shown in Figure 11, we estimate that the developmentsin the economy since March 2022 will increase borrowing this fiscal year by £51 billion
and in the medium term (by 2-26-27) by around £23 billion per year.
FIGURE 11: Rising inflation and interest rates have increased the forecast for
net borrowing by £136 billion over the next five years
Estimated change in public sector net borrowing forecast since March 2022 fromchanges in the economy, by fiscal driver: UK+£80bnWelfare spending

Other taxes

Income tax and NICS

Debt interest

Total+£60bn+£40bn+£20bn£0-£20bn-£40bnNegative numbers represent
lower-than-expected borrowing
2022-232023-242024-252025-262026-27

NOTES: Forecasts are based on the Bank of England’s August 2022 Monetary Policy Report. These
forecasts are expanded and extended to provide an economic scenario which is used in the Resolution
Foundation fiscal model. The inflation component input to these forecasts are based on the Resolution
Foundation’s inflation forecast model (see: J Leslie, In the Dread of Winter, Resolution Foundation, August2022). Interest rates are based on market yield curves up to 16 September 2022.
SOURCE: RF analysis of Bank of England, Monetary Policy Report & Yield Curves; OBR, Economic and fiscal
outlook, various; ONS, Consumer price inflation; BEIS, Weekly Fuel Prices.

6 Higher inflation leads to an increase in expected future interest and redemption payments on index linked gilts. These payments,
while not requiring immediate cash out of HM Treasury, are recognised upfront in borrowing, and so affect this year’s borrowing
forecast.
7 The main two effects are that VAT revenues increase because the nominal value of sales in the economy rise (and do so more than
the fall in the volume of sales created by a weakening economy) and that frozen tax thresholds will mean a greater proportion ofincome falls within the scope of tax or higher tax rates.
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The cost of supporting the economy through the energy price shock requires
a temporary increase in borrowing, but the Chancellor has also increased
borrowing through permanent tax cuts
The changes to the fiscal outlook from the economy, while large, are dwarfed in the nearterm by the policy changes announced since Liz Truss became Prime Minister. These
policy changes fall into two camps: immediate measures to cushion households andfirms from rising energy prices, and tax cuts. The exact cost of energy support for families
and firms is discussed further in Box 2.

BOX 2: The Energy Price Guarantee and Energy Bill Relief Scheme
The Energy Price Guarantee (EPG)
provides much-needed support tohouseholds over this winter by capping
typical household energy bills at£2,500 for two years, while the Energy
Bill Relief Scheme (EBRS) provides
broadly similar levels of support for
non-domestic customers (such as
businesses, charities and public
sector organisations) for six months.
The Government has now confirmedthat both schemes will be fundedby the state rather than through billclawbacks, at an estimated cost overthe next six months of £31 billion
for households, and £29 billion forbusinesses.8
However, the eventual price tag,particularly of the EPG, will depend onwholesale gas and electricity prices
over the coming months. Based on
gas and electricity futures prices from21 September 2022 (combined withremoving the environmental levy of
approximately £150 per annum), we
estimate the cost of the scheme forhouseholds will be upwards of £100
billion over two years, as Figure 12
shows. 9
But wholesale energy prices are highly
volatile. For example, wholesale gas
futures prices for this winter peaked
above £8/therm on average in August,
but have now fallen back to £4.59/
therm. Figure 12 also highlights what
this means for the uncertainty of the
EPG (where there is no ceiling on the
Government’s liability).

8 Costings taken as an average of market prices during 10 working days between 29 August and 12 September, after also taking
green levies off bills.
9 This updates a forecast first shown in: A Corlett et al, A blank check: An analysis of the new cap on energy prices, The Resolution
Foundation, September 2022
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FIGURE 12: The total price tag of the Energy Price Guarantee could varysignificantly depending on future wholesale gas and electricity prices
Estimated total cost of EPG by quarter, by wholesale futures curves: UK£50bn

19 Sep estimate

21 Sep estimate

6 Sep estimate

Government costing for winterFrom Q2 23 support is for households only

£45bn
£40bn
£35bn
£30bn
£25bn
£20bn
£15bn
£10bn
£5bn
£0

Q4 2022

Q1 2023

Q2 2023

Q3 2023

Q4 2023

Q1 2024

Q2 2024

Q3 2024

NOTES: Assumes that the wholesale supported rates are in line with business support of £211 £/MWhfor electricity and £75 £/therm for gas. Environmental levy assumed to apply to all UK households andweighted based on energy consumption throughout the year. We have based our estimates for the costof the scheme on wholesale gas and electricity prices for the periods covered by the EPG (rather thanwholesale costs, in line with Ofgem’s price cap methodology, which assumed a particular hedging strategy
over the price cap assessment period). Government figures for domestic gas and electricity consumption
are taken from 2019 to avoid pandemic effects, and are weighted by quarter to reflect higher energy use in
the winter months. This estimate comes with inherent uncertainty, not only in terms of volatility in energy
markets, but also how households and businesses will response to price signals by reducing demand.
Government costing weighted by energy consumption.
SOURCE: RF analysis of BEIS gas and electricity consumption data, Ofgem Default Tariff Cap methodology,
ICE exchange data, ONS Families and households in the UK: 2021.

Shifts in wholesale futures prices overjust two days, Monday 19 September
to Wednesday 21 September, would
have changed the estimated cost of
the household scheme over the next
two years by £20 billion. The EBRS has

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largely built in an upper limit on theamount that the Government will pay,so the uncertainty about its cost relate
more to what will be surely be intenselobbying about which sectors will haveaccess to support beyond March 2023.

Blowing the budget | Assessing the implications of the September 2022 fiscal statement

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Figure 13 draws together the impact of the weaker economy and the policy decisions on
the forecast for government borrowing. In total, the impact of inflation, energy support
packages, and tax changes are expected to add £130 billion to borrowing this year, and£411 billion cumulatively over the next five years.
FIGURE 13: Total borrowing over the next five years is set to be over £400 billion
higher than previously projected
Estimated change in public sector net borrowing forecast since March 2022: UK+£140bn+£4bn+£120bn+£100bn£0

Economy update+£60bn+£27bn+£15bn+£40bn+£20bnEnergy guarantee

May energy bill support
Memo: March forecast headroom+£80bn+£60bnTax policy+£45bn+£50bn+£31bn+£39bn+£19bn+£22bn+£22bn+£23bn2023-242024-252025-262026-27+£51bn2022-23

NOTES: Forecasts are based on the Bank of England’s August 2022 Monetary Policy Report economic
forecasts. These forecasts are expanded and extended to provide an economic scenario which is usedin the Resolution Foundation fiscal model. The inflation component input to these forecasts are basedon the Resolution Foundation’s inflation forecast model (see: J Leslie, In the Dread of Winter, Resolution
Foundation, August 2022). Interest rates are based on market yield curves up to 16 September 2022.
Energy guarantee costings are from the Government in 2022-23 and based on gas futures curves from 21
September 2022 for subsequent years. Costings do not include money for business support for energy bills
after 2022-23.
SOURCE: RF analysis of Bank of England, Monetary Policy Report & Yield Curves; OBR, Economic and fiscal
outlook, various; ONS, Consumer price inflation; BEIS, Weekly Fuel Prices; Cornwall Insight; ICE; HMT.

As a result, as shown in Figure 14, the peak in borrowing this year is now expected to bea little over half the peak during the pandemic (8.8 per cent of GDP compared to 14.8 percent) before settling at 3.4 per cent of GDP in the medium term. That is 2.3 percentage
points higher than had been expected by 2026-27, and is 0.7 percentage points higher
than the average level under the last Labour government (1997 to 2010).

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FIGURE 14: Borrowing and debt forecasts are far higher than before
Outturn and forecast of public sector net borrowing and debt, as a share of GDP: UK
16%

100%

PSNB (Mar EFO)

14%

95%

12%

90%

10%

PSNB (RF)

85%

8%

80%

6%

75%

4%

70%

2%

65%

0%
2010-11

2015-16

2020-212025-26

60%
2010-11

PSND (RF)PSND (Mar EFO)

2015-16

2020-212025-26

NOTES: Forecasts are based on the Bank of England’s August 2022 Monetary Policy Report economic
forecasts. These forecasts are expanded and extended to provide an economic scenario which is usedin the Resolution Foundation fiscal model. The inflation component input to these forecasts are basedon the Resolution Foundation’s inflation forecast model (see: J Leslie, In the Dread of Winter, Resolution
Foundation, August 2022). Interest rates are based on market yield curves up to 16 September 2022.
Energy guarantee costings are from the Government in 2022-23 and based on gas futures curves from 21
September 2022 for subsequent years. Costings do not include money for business support for energy bills
after 2022-23.
SOURCE: RF analysis of Bank of England, Monetary Policy Report & Yield Curves; OBR, Economic and fiscal
outlook, various; ONS, Consumer price inflation; BEIS, Weekly Fuel Prices; Cornwall Insight; ICE; HMT.

That 2.3 per cent of GDP equates to £67 billion higher borrowing in 2026-27 thanpreviously forecast. That means not just blowing through the pre-existing headroom
against the key fiscal rule to have debt falling, but doing so twice over.10 Although theeconomy explains part of this deterioration, tax cuts explain around two-thirds of thetotal medium-term increase in borrowing. Indeed, as shown as shown in Figure 15, this is
the largest permanent increase in borrowing on record.
There has been a similar deterioration in the forecast for debt, which is now expected toreach around 95 per cent of GDP by 2026-27, far higher than the 80 per cent projectedin March (Figure 14). The new Chancellor stated that “the government is committed
to fiscal sustainability and reducing debt as a proportion of Gross Domestic Product(GDP) over the medium-term”. Were he to want to meet that in actuality by 2026-27, andassuming that tax rises have been ruled out, government spending would need to be cutby £36 billion (1.2 per cent of GDP) in that year. To put that in context, it is a little over £1billion less than the total cut to public sector current expenditure in day-to-day spending
under George Osborne’s austerity period from 2010-11 to 2017-18 (£37.7 billion in 2026-27
10 Headroom is measured against the rule for debt to be falling as a share of GDP.
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Blowing the budget | Assessing the implications of the September 2022 fiscal statement21

terms), and nearly the same in real per capita terms as the spending cuts he announced
in the June 2010 Budget.11 These exact figures are sensitive to the rate of growth in theeconomy; if nominal GDP grows at a faster or slower rate than is currently expected, thenfewer or more spending cuts respectively would be needed to meet that ambition.
FIGURE 15: This is the largest permanent fiscal loosening on record
Change in public sector borrowing in the final year of the forecast, adjusted for GDPdeflator inflation, selected fiscal events since 1977, 2021-22 prices: UK
Sep
2022

£60bn

Nov
2008

£56bn

Apr
2009

£50bn

Mar
2020

£44bn

Nov
2020

£38bn

Nov
2016

£32bn
£0

£10bn

£20bn

£30bn

£40bn

£50bn

£60bn

£70bn

NOTES: chart shows the final year of the forecast available for comparison in the OBR’s Historical forecasts
database for public sector net borrowing adjusted for changes in the GDP deflator (taken from the OBR’s
Public finances databank).
SOURCE: RF analysis of OBR, Historical official forecast database & Public finances databank – August2022; and HMT, The growth plan 2022.

The Government’s strategy is to hope the economy grows fast, butthere are significant risks which could further worsen the fiscal
outlook
Chancellors always face significant unknowns when setting fiscal policy but Kwasi
Kwarteng has loosened policy in the context of unusually high levels of uncertainty.
Figure 16 puts the analysis above of changes in borrowing into a historical context. Therehas, rightly, been a tendency for the Government to borrow more when the economic
outlook worsens, particularly at short-term horizons (i.e. one-year horizon). But thisrelationship weakens looking further ahead into the forecast because traditionally
governments will use policy changes to offset changes in the economy and keep
the public finances sustainable. At the third year of the forecast, we project that the
11 Figures in real terms using the OBR’s March 2022 GDP deflator forecast.
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borrowing forecast has risen by 2.1 percentage points, which would be the second
largest change between official forecasts since 1999. At the same time the change inthe outlook for nominal GDP is negative but not particularly extreme. In other words,
the fiscal loosening is unusually high given the change in the economy despite the huge
uncertainty about the outlook.
FIGURE 16: Relative to history, the fiscal loosening looks large
Change in forecast level of nominal GDP and public sector net borrowing (as a share ofGDP) between successive Government/OBR forecasts: UK, 1999-2022
1 yearChange in forecast level of public sector net borrowing+10ppts+8pptsLower GDP &higher borrowing+6ppts+4pptsEstimated 3-year change inBank of England nominal
GDP forecast Feb to Aug
2022 and RF projection forchange in PSNB

3 yearHigher GDP & higher borrowing+2ppts0ppts-2ppts-4ppts-6ppts-8pptsLower GDP & lower borrowing

-8%

-6%

Higher GDP & lower borrowing

-4%

-2%

0%

+2%
+4%
+6%
Change in forecast level of nominal GDP

NOTES: The change in the PSNB forecast is defined as the percentage point change in PSNB as a shareof GDP between successive Government/OBR forecasts based on the year of the forecast. The change
in GDP is defined as the percentage change in nominal GDP between successive forecasts where these
forecasts have been adjusted by the gap between latest ONS outturns and the forecast made in thecontemporaneous fiscal year (or the previous year if available). This is intended to remove the impact ofreclassification decisions made by the ONS. The change in the nominal GDP forecast is roughly backed out
from the Bank of England’s February and August forecast (accounting for revisions) and should be treatedas approximate.
SOURCE: RF analysis of OBR, Historical Forecast Database; Bank of England, various.

The Government is explicitly pinning its hopes for fiscal sustainability on a material
increase in the growth rate in the economy. The likelihood of this is discussed below, butthere are also various risks which could or are likely to worsen the fiscal outlook beyond
what is projected. These fall into three broad categories.
First, there will be significant pressures for the Government to change stated policy
in ways which will require additional borrowing. Fuel duty is a classic example where
current policy is for it to rise in line with RPI inflation, but, in practice, it has been frozen
for over a decade and there is no prospect of it rising anytime soon.12 Scrapping fuel duty
increases is projected to cost around £4 billion by 2026-27, a likely and material further
12 OBR, Economic and Fiscal Outlook, March 2022.
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increase in borrowing.13 There could also be continued pressure on business rates. Under
current plans from 2023-24, the business rates multiplier will rise in line with inflation.
The increase in the inflation forecast means as much as an additional £10 billion in costs
for businesses per year by 2026-27 (relative to the forecast in March 2022), which may be
hard to sustain politically. And, of course, there continues to be significant pressure on
public services. The Government said very little about its spending plans as part of the
fiscal statement but one area where higher spending has been promised is on defence.
The Spending Review 2021 outlined defence spending would rise to 1.8 per cent of GDP
by 2024-25.14 Liz Truss has since committed to raising defence spending to 3 per cent of
GDP which would equate to around £30 billion extra spending a year.
Second, the cost of the Government’s energy price guarantee is dependent on themarket price of gas and electricity. The market is extremely volatile (as highlighted
in further in Box 4) and the Government’s finances are now directly exposed to thatvolatility. In addition, the Government plans to extend the business support after the
initial six-month period but there is currently no announced policy and so the costs ofthis have not been included in our projections.
Third, the economic outlook itself is highly uncertain. The current plans make clearthat the Government is hoping for growth to rise, with the Chancellor setting out a new
2.5 per cent growth target. That is far from certain and indeed the economy could slow
more, or inflation rise faster, than expected. There is also the additional risk that markets
lose confidence in the UK’s economic management. Market moves on the day of the
fiscal statement make this risk plain: 10-year gilt yields rose by around 25-30 basis points
after the Chancellor’s statement, with even larger rises for shorter-term yields. Currency
markets also showed a negative reaction with sterling falling by more than 2 per centagainst the dollar by the afternoon. These moves have real costs to the Government
finances: a sustained rise in gilt yields of 30 basis points equates to around £5 billion in
additional interest costs per year by 2026-27, and a currency devaluation will raise importprices and thus further increase inflation.
As it stands it is clear that the Government is not on track to meet the previous
Government’s fiscal rules, nor are the plans consistent with medium-term fiscal
sustainability without significant spending cuts (given the likely ruling out of tax rises).

13 This assumes the 5p cut as part of the measures to deal with the rise in fuel costs is reversed. If not, that represents an even larger
fiscal risk.
14 Based on the OBR’s March forecast of GDP.
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The sharp rise in spending will boost demand this winter, but will
likely be offset by higher interest rates in the medium term
The Chancellor’s fiscal statement was framed in terms of stimulating growth. This isclearly the right priority: UK GDP per capita growth over the past 15 years has been
weaker than any similar period since the 1930s.15 This weakness has left the UK in aperiod of relative decline compared with its peers – indeed the average productivity gap
with France, Germany and the US nearly doubled between 2008 and 2019.16 So, how likely
is it that the Government’s new approach will bring about faster growth?
Fiscal giveaways will support growth in the very near term, giving the economy a‘sugar-rush’ boost to demand. By protecting households from very sharp increases inenergy prices, the EPG means that consumer spending should be much stronger thanotherwise expected this winter. To provide a rough guide to the scale of this effect, theGovernment’s estimate of £60 billion for energy bill support this winter, could boost thelevel of GDP by roughly 1.5 per cent based on standard OBR multipliers.17 This effect on
the economy could be relatively rapid given the direct boost to household’s incomes andfirms’ cashflow.
But the likely interest-rate response from the Bank of England means that the level of
GDP will not be higher in the medium term. Indeed, while the Government has its footon the accelerator, with measures that will boost demand, the Bank of England has
its foot firmly on the brake. Following seven successive interest rates hikes, it is clearthat the Bank views demand in the economy as increasing above its supply capacity.
So the measures announced in the fiscal statement, which are set to increase demandfurther, are likely to prompt a sharp interest rate response from the Bank of England.18
For example, more than 2 percentage points of higher Bank Rate would be needed tooffset the inflationary impact of the energy support this winter (again based on standard
multipliers).19 That said, the Bank has so far been reluctant to raise interest by morethan 0.5 percentage points at any one meeting – and then it takes around 18 months for

15 See, for example: Bank of England, A Millennium of Macroeconomic Data; and ONS, National Accounts.
16 Source: OECD, Level of GDP per capita and productivity dataset. For more on the UK’s relative decline, see: Resolution Foundation& Centre for Economic Performance, LSE, Stagnation nation: Navigating a route to a fairer and more prosperous Britain, Resolution
Foundation, July 2022.
17 We use the multiplier for ‘Other Annual Managed Expenditure’. See Box 2.1 in: The impact of fiscal policy on GDP growth andunemployment, Economic and Fiscal Outlook, , OBR, November 2020.
18 The September MPC Minutes noted that: “While the [Energy Price] Guarantee reduces inflation in the near term, it also means thathousehold spending is likely to be less weak than projected in the August [Monetary Policy] Report over the first two years of theforecast period. All else equal, and relative to that forecast, this would add to inflationary pressures in the medium term”, Monetary
Policy Summary and minutes of the Monetary Policy Committee meeting ending on 21 September 2022, Bank of England, 22
September 2022.
19 S Burgess et al., The Bank of England’s forecasting platform: COMPASS, MAPS, EASE and the suite of models, Bank of EnglandWorking Paper No. 471, 2013.
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interest rates to have their maximum impact on the economy.20 All this means that it isplausible that a winter recession could be avoided, before tighter monetary policy offsets
the growth boost in the medium term.21

In the longer run, policy makers should be cautious in assuming tax
cuts will reverse the UK’s sluggish growth
Of course, the Chancellor’s fiscal statement was not all about stimulating growth
via increased demand, but also about stimulating supply. Critically, the Government
has cancelled the planned rise in the headline rate of Corporation Tax (CT), a serious
giveaway of around £18 billion by 2026-27. However, it would be unwise to expect a large
boost to long-term growth from this measure, for two reasons. First, the change is justcancelling a planned rise that was itself not expected to harm growth a great deal. Figure
17 shows that the effective corporate tax rate – the share of profits paid in tax once all
the reliefs are taken into account – has been and is expected to remain relatively stable.
Maintaining corporate tax rates at the same level they have been at during the UK’s
period of slow growth is unlikely to fundamentally transform that slow growth.
Second, the evidence suggests that, on balance and within broad limits, corporate taxes
are not a major determinant of investment and GDP. In principle, CT cuts may boost GDP
by raising after-tax profits and thereby encouraging business start-ups, innovation andinvestment – something the UK certainly needs more of. A simple back of the envelope
calculation based on a standard model suggests that the impact of cancelling the CT
increase could be to increase the level of GDP by around 0.5 per cent per cent over the
medium term.22

20 For a discussion of the time taken for monetary policy to have its maximum effect on the economy, see: See: J Cloyne & P
Hürtgen, ‘The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom’, American Economic Journal:
Macroeconomics, American Economic Association, vol. 8, pages 75-102, October 2016; and C Ellis, H Mumtaz & Pawel Zabczyk,‘What Lies Beneath? A Time-Varying FAVAR Model for the UK Transmission Mechanism’, The Economic Journal, vol. 124, pages 668– 699, 2014.
21 The September MPC Minutes indicated that the UK is set to contract by 0.1 per cent in Q3 2022 having already contracted by 0.1
per cent in Q2 2022, Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 21 September
2022, Bank of England, 22 September 2022.
22 This is based on a simple neoclassical production function with a capital share of one-third, an elasticity of substitution of 0.7 and70 per cent of the present value of investment already being tax deductible due to depreciation allowances.
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Over five years, this would be 0.1 percentage point extra growth per year, enough to help
meet around one-tenth of the gap between recent trend growth and the Government’s
2.5 per cent growth target.23 In practice, the evidence is mixed and does not point to amajor impact on growth.24 This in part reflects that the effects of cuts will be attenuatedbecause a lot of these expenditures are already tax-deductible and any net impact will
also depend on how the cut is financed over the long run - i.e. whether other taxes are
increased that might harm growth, or whether growth-enhancing expenditure is cut at
the margin.
FIGURE 17: Despite falls in the headline corporation tax rate, the effective tax
rate has remained stable over time
Outturn and forecasted headline and effective corporation tax rate: UK
30%

25%
Headline corporation tax rate
20%

15%

Effective corporation tax…

10%

5%

0%
2012-13

Headline tax rate

Effective tax rate

Effective tax rate (CT rate flat at 19%)

Headline tax rate (CT rate increased to 25%)

Headline tax rate (CT rate flat at 19%)

Effective tax rate (CT rate increased to 25%)

2014-152016-172018-192020-212022-232024-252026-27

NOTES: Forecasts for the effective corporation tax rate have been calculated using OBR’s business profits
forecasts published in March 2022. The effective tax rate is for financial years while headline CT rates arefor calendar years (e.g., 2012-13 aligns to 2012).
SOURCE: OBR, Economic and fiscal outlook - March 2022, OBR, Economic and fiscal outlook – October
2021.

Consistent with this, there is a very weak relationship in practice between effective
corporate tax rates and investment rates across OECD countries (see Figure 18). So while
this tax cut may boost growth at the margin, counting on it to achieve the transformation
the Government is aiming for is risky.

23 Growth needs to increase by about 1 percentage point per year if the Government’s 2.5% growth target is to be achieved.
24 Some studies find a large effect: see for example, J Cloyne, J Martinez, H Mumtaz & P Surico, Short-Term Tax Cuts, Long-Term
Stimulus, Working Paper 30246, July 2022. However, a recent literature review finds limited evidence of positive effects ofcorporation taxes on growth, with big differences between studies. See: S Gechert & P Heimberger, Do corporate tax cuts boost
economic growth?, Working Paper 201, May 2021.
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FIGURE 18: The relationship between business investment and the effective
rate of corporation tax is very weak
Corporate investment as a share of GDP and modelled effective corporation tax rate
for OECD countries, 2017-19
Corporate investment as a share of GDP
25%
Korea

20%

Japan
France15%

Germany
United Kingdom

10%

Italy

Australia
United States

5%

0%

0%

5%

10%

15%

20%

25%

30%

35%
40%
45%
Modelled effective tax rate

NOTES: Ireland and Costa Rica are dropped as outliers. Iceland and Israel are dropped due to missing
investment data. A three-year average (2017 to 2019) for corporate investment as a share of GDP andmodelled effective tax rate has been used. A two-year average of the effective tax rate (2018 to 2019) isused for Latvia due to missing data.
SOURCE: OECD, Corporate Tax Statistics: Third Edition.

However, there were other tax cuts beyond the flagship cancellation of the CT rise
which could plausibly have some growth effect. For example, cuts in the top rate ofincome tax could in principle similarly boost GDP by encouraging enterprise, innovationand technology adoption, although many of these activities already attract reliefs.25
Overall, however, there is no strong evidence of a link between top income tax rates andeconomic growth, across countries or over time.
Likewise, the evidence is weak that changes to marginal tax rates for typical workers(such as the NICs cut) increases overall labour supply.26 The liberalisation of IR35 selfemployment tax rules is likely to cost the Government substantial revenues withoutmaterially affecting the level of genuine self-employment (see Box 3).

25 See C Jones, Taxing Top Incomes in a World of Ideas, Journal of Political Economy 130 (9), September 2022 and U Akcigit, J Grigsby,
T Nicholas & S Stantcheva, Taxation and Innovation in the 20th Century, The Quarterly Journal of Economics 137(1), June 2021
respectively for theory and evidence in support of this idea.
26 The 2010 Mirrlees Review concluded that ‘hours of work do not respond particularly strongly to the financial incentives created by
tax changes for men, but they are a little more responsive for married women and lone mothers’, and the latter are mainly found
to respond through changes in participation rather than changes in hours. See: Mirrlees Review of Taxation, Dimensions of Tax
Design: Labour supply and taxes, September 2010.
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BOX 3: Complex contracting
The IR35 tax rules were reformed
in 2016 Budget when businesses
were given more responsibility for
determining the tax status of theircontractors. The aim of the policy wasto ensure that contractors who are notgenuinely self-employed pay the same
Income Tax and National Insurance
contributions as employees, and thatbusinesses could not avoid taxes byhiring self-employed workers in theplace of regular employees.27
Repealing this provision, as the
Chancellor has indicated theGovernment will do by April 2023, willbring about a fall in tax revenue of £1.1
billion next fiscal year, and £2.0 billion
a year by 2026-27, presumably becauseof abuse as contractors choose to
self-declare their self-employed status(which comes with a significant tax
advantage over employees).28 Whenthe IR35 reforms were implemented forthe public sector, an estimated 50,000
workers switched from self-employment
to employee status, increasing tax

revenue by up to £275 million a year.29
The impact of the more recent private
sector reforms is uncertain but almost
certainly far larger, given how many
more self-employed people there arein the private sector.30 And although
it is not a given that all workers who
switched to employee status will returnto self-employment (some may be
put off by the administrative burdenof reclassifying, for example), thehigh estimated cost of this measuresuggests that the Treasury expect
significant numbers to do so.31
As we have argued in the past, there
is a strong case for equalising selfemployed and employee taxes acrossthe board – and so reinstating billionsof pounds of tax avoidance for workers
who can switch their employment
status is hard to justify. 32 But repealing
IR35 may also end up reducing the tax
burden of higher earners more thanthose on lower pay: previous Resolution
Foundation analysis suggests that it
was primarily workers in higher-paying

27 HMRC, Understanding off-payroll working (IR35), May 2021; National Audit Office, Investigation into the implementation of IR35 tax
reforms, February 2022.
28 T Bell & H Slaughter, Crystal balls vs rear-view mirrors: The UK labour market after coronavirus, Resolution Foundation, April 2020.
29 National Audit Office, Investigation into the implementation of IR35 tax reforms, February 2022.
30 In 2015, before the initial IR35 policy was announced, there were nearly 6 times as many self-employed workers in the private
sector as in the public sector. Source: ONS, JOBS02: Workforce jobs by industry, September 2022.
31 Two years after the implementation of IR35 in the public sector, 50,000 public sector contractors had become employees and thenet increase in tax revenue was £275 million, implying a net gain of £5,500 per worker. See: National Audit Office, Investigation into
the implementation of IR35 tax reforms, February 2022. If we assume this is also the net loss per worker (across both public andprivate sectors) once the policy has been repealed, the Treasury’s costing of £2.0 billion in 2026-27 would imply around 370,000
workers switching status. Although this is a somewhat simplified calculation, it is fair to assume that the Treasury expects thenumbers of workers affected to be in the hundreds of thousands.
32 T Bell & H Slaughter, Crystal balls vs rear-view mirrors: The UK labour market after coronavirus, Resolution Foundation, April 2020.
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Blowing the budget | Assessing the implications of the September 2022 fiscal statement

occupations who switched their status
in 2021, and who now have a clear
incentive to revert to their former
self-employed status.33 So, as well as

29making the IR35 repeal a regressive
policy, higher earners moving into selfemployment could increase the scale of
the resulting tax avoidance.

Finally, the Government has outlined plans to introduce Investment Zones (IZs): areaspecific tax incentives and planning liberalisation aimed at encouraging business
investment and boosting economic activity. Location will be important – while poorer
areas may be tempting targets for this policy it is important to learn from the lessons of
the past and focus IZs in areas which have links to urban areas, have high potential for
growth, or where constraints around costs and planning are truly binding. Two previous
versions of this policy have underperformed expectations.34
Overall, the tax cuts and structural measures announced may provide some limited
support to growth in the medium term but will be nowhere near enough to get us to a
new 2.5 per cent trend GDP growth rate, nor to pay for themselves. The £45 billion oftax cuts announced yesterday would need to increase GDP by 4 per cent over the longterm in order to be self-funding – an implausibly large boost for measures that are more
likely to have a marginal long-run effect on GDP. A prudent Chancellor should therefore
assume they will require higher borrowing or public spending cuts in the years ahead.

The outlook for household finances has improved slightly as a resultof higher borrowing, but is still very poor
Despite the significance of both the EPG and the newly announced tax cuts, as well as
the earlier support packages for 2022-23, the outlook for real household incomes remains
extremely poor, as we show in our updated, detailed projections.35 Putting together
policy choices and economic forecasts (primarily from the Bank of England given thelack of new OBR figures), we project real household disposable incomes up to 2026-27.
For non-pensioners, the typical equivalised income after housing costs falls by 4 percent (£1,000) in 2022-23 and another 4 per cent (£1,100) in 2023-24, leaving real incomes
8 per cent (£2,100) lower in real terms than in 2021-22 (see Figure 19). Thanks to the EPG
in particular, this is actually an improvement on the previous vintage of our projections
33 See Figure 7 of: N Cominetti et al., Labour Market Outlook Q1 2022: How should we interpret strong nominal earnings growth?,
Resolution Foundation, April 2022.
34 See Evidence Review: Area Based Initiatives, What Works Centre for Local Economic Growth, January 2016 and P Swinney, In thezone: Have enterprise zones delivered the jobs they promised?, Centre for Cities, 2019.
35 Our method is described further in A Corlett & L Try, In at the deep end: the living standards crisis facing the new Prime Minister,
Resolution Foundation, September 2022. Our latest projections are based in part on the Bank’s August economic forecasts, but
we use an adjusted inflation forecast that accounts for the EPG. We assume that the employer NICs cut boosts wages and cuts
prices (in line with OBR estimates) but do not include an adjustment for lower Corporation Tax or any other assumptions of higher
economic growth. However, nor do we make any adjustment for any counteracting change in monetary policy.
Resolution Foundation

Blowing the budget | Assessing the implications of the September 2022 fiscal statement30(which forecast a 10 per cent fall).36 But this two-year fall is nonetheless only paralleled in
the historic record by the mid-1970s: by comparison, incomes fell by 5 per cent between
2009-10 and 2011-12 during the Financial Crisis.
FIGURE 19: Despite significant Government support, the typical householdincome of non-pensioners is set to drop by 8 per cent between 2021-22 and2023-24
Real median non-pensioner equivalised household disposable income, after housing
costs, 2021-22 terms: GB/UK£27,000£26,000

10-yeargrowthof 1%

10-year growthof 4%£25,000£24,000£23,000

10-year growthof 30%

RF projection£22,000£21,000£20,000£19,000£18,000
1996- 1998- 2000- 2002- 2004- 2006- 2008- 2010- 2012- 2014- 2016- 2018- 2020- 2022- 2024- 202697
99
01
03
05
07
09
11
13
15
17
19
21
23
25
27

NOTES: All figures beyond 2019-20 are projected.
SOURCE: RF analysis of DWP Stat-Xplore and Households Below Average Income; and RF projection
including use of the IPPR Tax Benefit Model, ONS data, and Bank of England and OBR forecasts.

Inflation is at the heart of this picture, with prices in 2022-23 projected to be 10 per centhigher than in 2021-22, and to rise by another 7 per cent in 2023-24.37 As a result, despite
a projection of continued high nominal earnings growth of over 5 per cent through 202324 – supported slightly by the cut to employer NICs – real pay is continuing to fall. We
assume that most benefits will rise in line with inflation, as usual, and therefore receive
a significant boost of around 10 per cent next April and 8 per cent in April 2024 (thoughthese increases will merely maintain the real value of benefits, and only with a significantlag). In addition, much of the substantial support provided to households in 2022-23
was temporary (meaning that energy costs will effectively rise in April when the £400
rebate expires); the outlook for households is further worsened by the Bank of England’s
36 A Corlett & L Try, In at the deep end: the living standards crisis facing the new Prime Minister, Resolution Foundation, September
2022.
37 Projected inflation is based on RF analysis building on the Bank’s August 2022 Monetary Policy Report but incorporating theimpact of the EPG.
Resolution Foundation

Blowing the budget | Assessing the implications of the September 2022 fiscal statement31

projections that unemployment will rise – going from 3.6 per cent in the most recent data
(May to July) to 6.3 per cent by Q3 2025; and by rapidly rising mortgage interest costs.38
As a result, based on current forecasts, there is no rapid recovery to be expected beyond
2023-24. Instead, the fall in incomes between 2019-20 and 2024-25 is still projected tomake this comfortably the worst parliament on record for changes in living standards,
with a 5 per cent drop in the typical income. The ten years from 2016-17 to 2026-27 arecurrently projected to be a lost decade for non-pensioner household income growth(with just a 1 per cent – or £300 – rise), on top of poor performance over the previous
decade (just 4 per cent growth, or £1,000).

Despite extensive state support, the incomes of the poorest
households are set to fall sharply next year
Beyond the median, projected living standards changes vary greatly across the income
distribution. In 2022-23, the poorest have been relatively well-protected due to bothtargeted and universal support (although this does not account for the fact that lowerincome households have faced higher inflation than richer ones).
As Figure 20 shows, the total impact of living standards support this year are shared fairly
evenly, with households benefiting by £2,070 on average. The highest income decile is theoutlier, with households benefiting by £2,500. Of this support in 2022-23, the Energy Price
Guarantee comprises the highest share of support with the highest-income households
receiving £1,300 compared with £1,000 for the lowest-income households.39

38 Our projections use OBR forecasts from March 2022 for average mortgage interest payments. This may be an underestimate in themedium term given that the forecast then was for Bank Rate to peak at 1.9 per cent (they have already risen to 2.25 per cent), but
actual payment increases (as measured within the RPI basket) have so far been slower than expected.
39 While higher-income homes use slightly more energy than lower-income households, the most important predictors of how muchenergy a household uses is a combination of who lives in the household and the size and energy efficiency of the home, making
the EPG relatively flat across the income distribution.
Resolution Foundation

Blowing the budget | Assessing the implications of the September 2022 fiscal statement

32

FIGURE 20: The Energy Price Guarantee comprises the largest support forhouseholds this year, but the National Insurance rise reversal provides benefits
for higher income households
Average policy impacts of cost of living interventions by decile of equivalised householdincome, after housing costs: GB/UK, 2022-23£3,000£2,500

Reverse NI increase from November
Cost of Living Payments
Energy Bill Discount

Raise NI threshold
Council Tax Rebate
Energy Price Guarantee

15£2,000£1,500£1,000£500£0Poorer2

3

4

6

Net household income decile

7

8

9

10

Av.

RicherNOTES: As per the fiscal statement, NI rise is reversed in November 2022 (in line with abolishing the Healthand Social Care Levy from April), and it does not model any changes to employer NI. EPG savings using
per unit prices and standing charges for 34p/KWh unit and 46p per day standing charge for electricity
and 10.3p/KWh and 28p per day standing charge for gas announced by BEIS. The gain is relative to preannounced Ofgem Q4 2022 price cap, Cornwall Insight forecast for Q1 and Q2 2023 released 8 September,and RF assumptions up to Q1 2024 based on earlier Cornwall Insight forecasts. EPG benefits compared to
Ofgem price cap and therefore modelled for GB only. Other benefits modelled for UK.
SOURCE: RF analysis of DWP, Family Resources Survey, using the IPPR Tax Benefit Model; the Living Costs
and Food Survey, 2019-20; BEIS energy bills support factsheet; counterfactual Cornwall Insights priceforecasts.

The relative protection of lower income households (given their lower income levels) thisyear is shown in Figure 21, which is exactly as it should be given the impact of the living
standards shock is far greater for poorer households. In 2023-24, however, this is reversed– despite the assumption of 10 per cent benefit uprating. The typical low-income nonpensioner in the bottom fifth of the income distribution (‘p10’), could be 8 per cent worse
off in 2023-24 than 2022-23 in real terms, which would be the worst drop on record. In
contrast to the rest of the population, the top 5 per cent may have higher real disposable
incomes in 2023-24 than in 2022-23, aided by Income Tax and National Insurance cuts.
This outlook is also reflected in our projections for absolute poverty – shown in Figure
22. Between 2021-22 and 2023-24, the proportion of people living in absolute poverty is
projected to rise from 17 to 20 per cent (again despite the EPG and an assumption of 10
per cent benefit uprating next April), with the proportion of children jumping from 23
to 28 per cent. These changes are equivalent to an extra 2.3 million people, including
an extra 700,000 children, living in poverty. Some of these increases are projected toreverse in 2024-25 due to another (assumed) high benefit uprating, but poverty rates arenonetheless projected to be higher in 2026-27 than 2019-20.

Blowing the budget | Assessing the implications of the September 2022 fiscal statement

33

FIGURE 21: Even with 10 per cent benefit uprating, the incomes of the poorest
are set to fall again next year
Annual real growth in average equivalised household disposable income for nonpensioners, after housing costs, by income vigintile: UK+10%Growth for the 2nd poorest
20th of the population

+8%
+6%

Growth for therichest 20th ofthe population

+4%
+2%
0%
-2%
-4%
-6%
-8%
-10%

202021202122202223202324202425202526202627NOTES: We exclude the bottom 5 per cent, due to concerns about the reliability of data for this group.
SOURCE: RF analysis of DWP, Households Below Average Income; and RF projection including use of the
IPPR Tax Benefit Model, ONS data, and Bank of England and OBR forecasts.

FIGURE 22: Absolute poverty is projected to rise in 2022-23 and 2023-24
Proportion of people living in absolute poverty, after housing costs: UK
35%

RF projection
Children

30%
25%
All
20%

Working-age
15%
Pensioners
10%
5%
0%
200203

200405200607

200809201011

201213

201415201617

201819202021202223202425202627NOTES: Outturn data is available for 2020-21 but the values shown here are our nowcasts, as we use 201920 rather than 2020-21 data as the starting point for our projections.
SOURCE: RF analysis of DWP & IFS, Households Below Average Income; and RF projection including use of
the IPPR Tax Benefit Model, ONS data, and Bank of England and OBR forecasts.

Resolution Foundation

Blowing the budget | Assessing the implications of the September 2022 fiscal statement

34

The new direction is clear, but huge, top-heavy tax cuts andunsustainable debt may be the wrong policies for the wrong time
Rising energy costs, surging interest rates and the aftermath of the pandemic mean thatthe early 2020s were already set to be a perilous time for households and a challenging
one for economic policy makers. But this was a fiscal statement that choose to introduce
huge permanent tax cuts in the name of growth. These measures mean two-thirds of thegains from the tax cuts will go to the richest fifth of households, who disproportionally
live in the South. But despite £45 billion in unfunded tax cuts by 2026-27, the policy
appears destined to fail on its own terms – with taxes as a share of the economy still set
to be sustained at levels not seen since the 1940s.
That said, the Government’s focus on trying to fix the UK’s lamentable growth
performance is clearly the right one. However, while demand-led growth will be surely
stronger in the near term, higher interest rates from the Bank of England mean that eventhe short-term ‘sugar rush’ provided by the fiscal giveaways are unlikely to mean theeconomic pie is bigger in the medium term. Looking ahead further ahead, what reallymatters is the extent to which the measures announced contribute towards achieving
the Government’s aim of raising trend growth to 2.5 per cent. Putting all our eggs inthat basket is high risk given limited evidence that tax changes like those announced
yesterday make a significant difference to growth rates.
Although the decision not to publish the forecasts offered by the OBR means that theoutlook is even more uncertain than usual, our analysis lays bare the consequences of
the Government’s new approach. Borrowing is set to rise by £400 billion in the coming
years and the permanence of the tax cuts – combined with higher interest rates andweaker growth – mean that the £30 billion of headroom the Government had back in
March has been blown through twice over. All this leaves debt on an unsustainable pathrising every year in the forecast. To achieve the new Government’s stated aim of debt
falling, swingeing spending cuts of around £35 billion in 2026-27 would be needed. Little
wonder that financial markets have responded by selling UK assets, increasing the costof borrowing at the 10-year point by nearly a percentage point.
All in all, the Government appears to have jettisoned fiscal conservatism to deliver thelargest tax cuts in half a century. The Chancellor has set the UK economy on a new
trajectory, one he hopes includes permanently higher growth but which will certainly
involve far higher borrowing levels and costs. By blowing the budget, he is taking a risk
beyond that adopted by economic policy makers for many a generation.

Resolution Foundation

The Resolution Foundation is an independent research and policy
organisation. Our goal is to improve the lives of people with low
to middle incomes by delivering change in areas where they are
currently disadvantaged.
We do this by undertaking research and analysis to understand thechallenges facing people on a low to middle income, developing practicaland effective policy proposals; and engaging with policy makers andstakeholders to influence decision-making and bring about change.
For more information on this report, contact:
James Smith
Research Director
james.smith@resolutionfoundation.org

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T Bell et al, Blowing the budget:
Assessing the implications of the September 2022 fiscal statement, Resolution Foundation,
September 2022

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