UK autumn budget statement: Putting market stability ahead of growth
The autumn budget statement by UK chancellor Jeremy Hunt was a cocktail of sharp tax rises and deep spending cuts that prioritises market stability over economic growth. As many of the measures were briefed ahead of today’s announcement, the market reaction was muted. On balance, the measures should have a further calming effect on the pound and UK government bonds although their negative impact on economic growth is considerable.
Chancellor bids to restore market stability
At today’s budget statement, the UK chancellor unveiled the measures with a total impact of £55 billion:
- Spending cuts add up to £30bn, totalling more than half of the package, while tax rises raise £25 billion.
- Income tax, personal allowance and higher rate thresholds are frozen for two years, which means that millions of people will pay more in tax as wages rise. This is known as a “stealth tax increase”
- The threshold at which the highest earners start paying the top income tax will be lowered to £125,140 from £150,000
- Support for energy bills continues but will become less generous from April 2023, limiting average bills to £3,000-£3,100 compared to £2,500 now
- The oil and gas industry is charged a significantly expanded windfall tax of 35% versus previously 25% and a new "temporary" 45% tax on electricity generators to help pay for the support
- There was some positive news – state pensions, benefits and tax credits will rise in line with inflation. Also, the National Living Wage will increase from the current level of £9.50 to £10.42 an hour for over-23s from April 2023
As I previously wrote, a possible sterling and UK government bond crisis after the September mini-budget was averted by central bank intervention in gilt markets and the government’s efforts to get back on a path of fiscal sustainability.
On 3 November 2022, the Bank of England raised rates by 75 basis points. The rate hike arguably would have been larger had it not been for the fiscal U-turns by the new chancellor. Markets were pricing more than a 100 basis points increase for that meeting prior to Mr Hunt’s appointment. While more rate hikes are yet to come, it’s good news for mortgage borrowers that market participants see the Bank of England base rate peak at 4.50% rather than well north of 5%.
Whereas the financial market impact of the budget has been benign, the real economic consequences are sobering. Notwithstanding the continued support with energy bills, the Office of Budget Responsibility projects real disposable incomes to fall by 7% over the next two years. This would bring average living standards down to a level last seen in 2013/14.
The bottom line
Today’s budget announcement continues the repudiation of Liz Truss’ economic programme. As of the time of writing, financial market reaction is muted. We expect that sterling has seen its low versus the U.S. dollar around 1.05 immediately after the mini budget. While the cheap valuation of the pound vis-à-vis the dollar is still supportive, the growth-negative impact of today’s budget could make further gains harder to come by.
1The purchasing power parity exchange rate for GBP/USD is around 1.43. Source: Organisation for Economic Cooperation and Development.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.