UK Budget - Quick Thoughts

A lesson in misnomers from Chancellor Reeves delivered this lunchtime:

• A ‘Budget for growth’ – where GDP growth doesn’t get above 2.0% in any year of the forecast horizon
• A ‘Budget for growth’ – where taxes were hiked by £40bln, the most ever in cash terms, topping Lamont’s £38.5bln of tax hikes in 1993
• A ‘Budget for growth’ – where inflation doesn’t achieve the BoE’s 2% target for another 5 years, leading to substantially tighter monetary policy for the foreseeable
• A ‘Budget for growth’ – where Government departments must save at least 2% from their budgets (AKA austerity)
• A ‘Budget for growth’ – where it will now cost considerably more for workers to recruit staff, while existing staff will likely receive smaller pay-rises, to fund a brutal 1.2% rise in employer National Insurance contributions
• A ‘Budget for growth’ – where capital gains tax has been hiked by 4%, further deterring international investors from allocating cash to the UK, and harming the nation’s competitiveness
• A ‘Budget for growth’ – where the flippant way in which inheritance tax rules are changed, particularly on pensions, will deter domestic investors from long-term planning, and sets a dangerous precedent for tweaking other similar tax measures in the future
• A ‘Budget for growth’ – where tax on carried interest will surge to 32%, further deterring international investors, and PE funds, from making the UK their base
• A ‘Budget for growth’ – where stamp duty on those purchasing second homes will increase, exacerbating the already dire domestic housing situation
• A ‘Budget for growth’ – where the fiscal goalposts have been moved, by changing the measure used to gauge the amount of government debt, with the new Public Sector Net Financial Liabilities (PSNFL) having the potential to lead to limitless Government spending
• A ‘Budget for growth’ – where fiscal headroom is still just £15.7bln, tiny in historical terms, leaving open the significant risk that Reeves will have to come back for more tax hikes, in the event of future economic shocks

For balance – while there were a handful of investments announced, including a £2.9bln hike in the defence budget, £2bln for the auto sector over “multiple years”, and £5bln for housebuilding, it remains to be seen the extent to which these measures deliver the desired return. Clearly, the OBR are somewhat doubtful, given the above forecasts.

The outlook for UK assets remains a poor one. While gilts have taken the Budget in their stride, and Reeves has avoided a Truss-esque market meltdown, the OBR’s latest forecasts paint a grim picture of sticky high inflation, and stubbornly low economic growth, well below Labour’s desire for 2.5% annual real GDP growth.

Consequently, gilts are likely to continue to lag DM peers, while headwinds facing the GBP are likely to remain relatively stiff, amid continued, and apparently structural, economic underperformance, particularly when compared to the US.

The BoE must now walk a tightrope, with stagflation becoming an increasingly bigger risk, particularly if today’s measures cause a further decline in both consumer and business sentiment, which has already tumbled in recent months. While a 25bp cut in November remains nailed-on, a rapid pace of further easing beyond then could well be in doubt, given the cost increases baked in today’s Budget.