Heads up: UK Autumn Budget will be in focus tomorrow

The Budget statement typically begins around 1230 GMT, following the end of PMQs. There will be a lot of moving parts to scrutinise but the key narrative is that UK Chancellor Reeves has a very, very tough balancing act to manage. Not only does she need to plug the £20 billion hole in public finances, she needs to reaffirm investors of her fiscal responsibility while having to keep Labour’s pledge on not raising taxes on the working class as well as keeping government spending under control. And all this while already coming under intense political pressure and scrutiny over the last few months.

For some context, public sector net debt in the UK now sits at 95.3% of GDP as of September – the highest in over six decades. Meanwhile, government borrowing ballooned up to £20.2 billion and that brings total borrowing in the first six months of the financial year to £99.8 billion. That is some £7.2 billion more than what the OBR had forecasted and is the second-highest total for the period since monthly records began in 1993, only seen behind that of 2020.

Given Labour’s manifesto commitment of not wanting to raise income taxes, Reeves will be limited in her scope to try and cover the gap. She might go down the route of introducing a “stealth income tax” i.e. freezing thresholds for a certain period of time, but that will still be rather unpopular I would presume. So, there’s definitely political risk/uncertainty in choosing this route.

As such, the only tax hikes we might see are ones on businesses, investments, and assets. However, that will likely draw flak from financial circles and weigh on the UK business/investment outlook. That’s a net negative as well but less politically harmful to herself and Starmer.

And come what may at the end of the day, it’s all about whether investors and traders deem her measures to be enough to get UK public finances back on track. If not, the bond vigilantes are going to have another field day and rising gilt yields will again be a concern not just to confidence in the UK economy but the currency as well.

I dived a bit into that earlier in the day here.

At the same time, the perception of tighter fiscal policy i.e. tax hikes could also pressure the BOE into cutting rates at a quicker pace. So, there’s that to consider and balance out in the medium-term.

All in all, there’s going to be plenty of moving parts here and we can only digest and make sense of it all after the fact. So, keep your eyes and ears peeled for the main event tomorrow.

This article was written by Justin Low at investinglive.com.