UK Budget Analysis: A jump in borrowing, taxation and spending was initially digested well but is under scrutiny as the OBR assessment is digested

Analysis details (15:15)

• Reeves outlined a larger-than-expected headline tax measure which is largely at the function of a hefty change to employer NI levels. Furthermore, Reeves changed the fiscal rules largely as expected. Within the budget, updates around draught beer, soft drinks, vaping, housing and retail/leisure property rates sparked some action in respective stocks. As a whole, the OBR assessed the budget as favourable for near-term growth but then largely unchanged from the prior views towards the end of the forecast period. From this, it is worth cautioning that the time-lag of Labour investment measures might mean that while the budget is medium/long-term expansionary, the benefit of this hasn’t been realised in the forecast period. The modest 5yr growth assessment is likely the primary factor behind Reeves having headroom of just GBP 15.7bln under her borrowing rule. Furthermore, the “golden rule” has headroom of just GBP 9.9bln, a figure which is near to the “historically small” figure at the Spring budget and could be subject to a downward-revision, or possible removal, on any negative update/shock to the Treasury’s revenue generation.


• Reaction to the budget has been mixed for individual stocks while GBP has benefited throughout on the widespread spending agenda. Gilts picked up throughout the budget, particularly when Reeves outlined the PSNB forecasts which fall considerably in the next few years and that she will be meeting the fiscal targets at the 3yr horizon, earlier than the required 5yr point. Limited reaction seen to the Gilt remit, which increased to GBP 296.9bln from 277bln and slightly above consensus of 294bln.


• However, as the budget concluded and the OBR released its assessment in full a pullback in Gilts has been seen which are now negative (initially had gains in excess of 100 ticks). Markets/analysts continue to digest the budget and moves, but in terms of a brief take, the pullback was potentially driven by digestion of the higher borrowing remit and the full OBR report. Within this, the OBR assessed the budget will increase UK interest and gilt rates by 0.25% and that firms will be passing on 60% of the hefty NI costs via lower wages and, crucially for the BoE, higher prices. We are still parsing through it but the OBR report has additional hawkish elements, such as them now forecasting a faster increase in mortgage rates. In summary, Pantheon wrote that “substantial extra upfront expenditure and looming jump in businesses’ labour costs, will compel the MPC to ease slowly.”


• The next steps will be the weekend’s media round from Chancellor Reeves and before/after any remarks from BoE officials or other respected bodies such as the IFS on the Chancellor’s first budget, assumptions within it and associated implications.

30 Oct 2024 - 15:15- Fixed IncomeData- Source: Newsquawk