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Truss and Kwarteng mini-budget to ‘deepen’ UK recession

Conservative Party Conference - Day Three
Soaring mortgage rates driven by lenders passing on higher market yields pushed up by a lack of confidence in prime minister Liz Truss and chancellor Kwasi Kwarteng’s growth plans are set to squeeze households even further (Photo by Stefan Rousseau - WPA Pool/Getty Images)

Liz Truss and Kwasi Kwarteng’s decision to slash taxes and ramp up borrowing without costing their plans will make the looming UK recession worse, City economists predicted today.

Soaring mortgage rates driven by lenders passing on higher market yields pushed up by a lack of confidence in prime minister Liz Truss and chancellor Kwasi Kwarteng’s growth plans are set to squeeze households even further.

If interest rates hit four per cent, as expected by consultancy Pantheon Macroeconomics, Brits’ spending power will shrink 1.2 per cent next year.

Samuel Tombs’, the firm’s chief UK economist, said the economy will shrink 1.5 per cent in 2023, 0.3 percentage points worse than he expected last month.

“The coming recession looks set to be both deeper and longer than we expected before, reflecting the drawn out nature of the hit to incomes from mortgage refinancing and the weaker pound, compared to the sudden shock from higher energy prices that we previously expected,” Tombs said.

The pound has recovered all its post mini-budget losses. It did kiss a record low against the US dollar last week.

Pound has surged against US dollar over last week

The pound has recovered all its losses since Truss and Kwarteng's mini-budget

Markets expect the Bank of England to lift interest rates to around 5.5 per cent next year. If that happened, mortgage rates would climb to six per cent, triggering an uptick in defaults, Tombs added.

However, analysts at investment bank Goldman Sachs pointed out that around 30 per cent of the UK population have a mortgage.

This group tends to be richer, meaning they have greater capacity to absorb higher mortgage servicing costs.

“At the same time, excess savings accumulated during the pandemic (of around £140bn) also appear to be skewed towards wealthier households. This should help cushion, at least in part, any incoming drag on household consumption,” Goldman said.

Truss and Kwarteng are reportedly mulling cutting public spending to shore up market confidence in the UK. This may include raising benefits in line with wages instead of inflation.

Tombs warned this would deal a further blow to the poorest living standards who are already struggling with elevated energy bills.

The chancellor and prime minister have said the best way to tackle the country’s cost of living crunch is by stimulating growth through lowering taxes. The pair U-turned on scrapping the top 45 per cent rate of income tax this morning.

​​”We’d put Ms. Truss’ chances of hitting her target of raising year-over-year growth in GDP to 2.5 per cent before the next election [in 2024] at only around five per cent,” Tombs added.