Background to the September 2022 fiscal statement

High inflation, the threat of a recession and falling real household incomes are among the issues the new Chancellor, Kwasi Kwarteng, faces.

To support households, businesses and other organisations with rising energy costs, the new Government has already announced an Energy Price Guarantee. It means a household with typical consumption will pay around £2,500 on energy annually, for the next two years.

The Office for Budget Responsibility will not be publishing revised forecasts for the economy and public finances.

Economic situation

Economic growth has been weak over the course of 2022, with the outlook for 2023 deteriorating as inflation has been rising. Consumers’ ability to spend, a key driver of economic growth, has been hit by the higher cost of living.

The pace of consumer price rises – the inflation rate – has been relentlessly moving upward over the past 18 months. A combination of strong global demand for consumer goods, rising energy and petrol prices, and Russia’s invasion of Ukraine have led to the inflation rate hitting a 40-year high of 10.1% in July, before easing slightly to 9.9% in August.

The Government’s announcement of a cap on household energy prices means further expected rises in the inflation rate will now not be as severe. This will likely mean the economic downturn, or possibly recession, that many economists expect heading into 2023 will be less pronounced.

The Bank of England is expected to continue to raise interest rates to try and depress inflation, which is well above the Bank’s 2% target. Many economists think the Government’s energy price support package will result in inflation being higher in a few years’ time than it would be otherwise, potentially leading to the Bank raising interest rates further.

How are public finances performing?

The Government’s budget deficit – the difference between its spending and income from taxes and other sources – has fallen from the peacetime records reached during the worst of the coronavirus pandemic. However, it remains relatively high by historical peacetime standards.

The OBR forecast in March 2022 that the budget deficit in 2022/23 would be equivalent to 3.9% of GDP. However, developments since March 2022 mean the deficit will likely be larger than that.

The recently announced energy price guarantee might add around £60 billion to borrowing this year, while other support for households, announced in May 2022, could add around £10 billion. Both were announced after the OBR had forecast a budget deficit of around £100 billion for 2022/23.

Government’s spending on debt interest is growing, largely due to rising inflation, but other factors are also pushing up debt interest costs. Compared with autumn 2021, the UK’s main interest rate is higher, and investors want higher rates of interest when they lend to the Government.

Inflation might benefit tax receipts, as it usually pushes up the value of the things tax is levied on, such as consumer spending. The scale of this indirect boost to revenues is very uncertain but is unlikely to be sufficient to cover the increase in debt spending in 2022/23.

What might the fiscal statement cover?

It’s thought that the Chancellor, Kwasi Kwarteng, will use the statement to fulfil some of the pledges that the Prime Minister made during the Conservative Party leadership election.

It’s widely expected that the Chancellor will reverse the recent 1.25%-point increase in National Insurance contributions and cancel the upcoming increase in the main rate of corporation tax.

The corporation tax main rate is currently set to increase from 19% to 25% in April 2023. Reversing both tax increases could lower forecast government receipts by around £30 billion a year. The Prime Minister says that she has “a bold plan to grow the economy through tax cuts and reform”. The Chancellor will publish a growth plan alongside the fiscal statement.

When the Energy Price Guarantee was announced no estimate of its cost was provided. The Chancellor might set out an estimated cost in the statement.

The fiscal statement will not be accompanied by revised forecasts for the economy and public finances from the OBR. This means the OBR will not judge whether the Government is still on course to meet its targets for the public finances, following the Chancellor’s statement and recent changes in the economy.

Further reading

The latest economic data are also available on the Library’s UK economy dashboard.

The Library website has a page which brings together our publications on the Ukraine crisis and another for the cost of living and inflation.