Chris Arcari, Head of Capital Markets, Hymans Robertson says: “Today’s Budget reflected the Chancellor’s limited room for manoeuvre. Higher gilt yields and a weaker economic backdrop since the spring had eroded the headroom provided by the fiscal rules, leaving difficult choices between tax, spending and borrowing. Importantly for markets, the government maintained its commitment to the existing fiscal framework. Some use of fiscal headroom can be justified, particularly where the government is responding to temporary economic pressures. However, the longer-term challenge remains. Large unfunded spending commitments or a sustained increase in borrowing would risk putting further upward pressure on gilt yields. Gilt yields remain high relative to the UK’s longer-term nominal growth potential. Today’s measures do not fundamentally change that picture. The government continues to face persistent spending pressures, while its manifesto commitments on the major taxes constrain the options available to raise revenue. The Budget announcements have therefore addressed some immediate pressures without resolving the UK’s more structural fiscal challenges. Individual tax and pensions measures can improve the public finances at the margins, but delivering a material and sustained reduction in borrowing and gilt yields is likely to require broader choices on tax and spending.”
David Rees, Chief Economist at Schroders: "Today's budget offered households some relief from the cost of living crisis, but not enough to change the economic outlook. Measures to ease consumer prices will help at the margin, but there is little reason to revisit our near-term forecasts that resilient growth and rising inflation mean the Bank of England will raise rates a couple of times, starting next week. Markets are unlikely to react much either. The bigger challenges are likely to lie ahead. One reason is that reduced fiscal headroom leaves the government vulnerable to further future upward pressure on gilt yields, at a time when the US economy is overheating and Europe is entering a fraught electoral period. Gilts typically move more sharply than the wider global bond market, and a 1-1.5% increase in yields would wipe out the remaining headroom, putting renewed pressure on the government to rein in spending. A second reason is that, with the government setting out ambitious plans for domestic spending and the UK's relationship with Europe, it seems likely that it will need to call an election sooner rather than later. If the bounce in opinion polls extends into next year, when some imported inflation pressures should begin to subside, an election could feasibly come as soon as the second half of next year."
Fixed Income - There are bigger fiscal problems elsewhere
James Bilson, Global Fixed Income Strategist at Schroders: "As was largely expected, the UK budget was uneventful - and this is exactly what the bond market wanted to see. We have recently seen with other countries, such as France, the perils of the market losing confidence in the fiscal outlook, and the Chancellor's statement today will help the UK avoid this fate. The new Chancellor inherited from his predecessor among the tightest - and therefore most bond-friendly - fiscal policy plans of any G10 nation for the next few years, and the key question was to what degree he would choose to deviate from this course. The answer, on a macro level, was not much. He stuck relatively closely to that prior path and that is ultimately a gilt-friendly outcome. Nonetheless, heading into 2027 challenges remain. The tight fiscal plans rely on real-terms spending cuts in unprotected government departments which may be politically difficult to deliver. That is a question for next year’s spending review, but for now, the budget passed the bond market test. We believe there are bigger fiscal problems elsewhere.”
Equities - A measured outcome for UK equities
Sue Noffke, Manager of the Schroder Income Growth Fund plc said: “For UK equities, this needed to be a budget that did no harm. After two years in which businesses absorbed significant increases in costs and taxation, avoiding another broad increase in the corporate burden is welcome. There are also measures that could make a positive difference. Action to reduce energy costs should help households facing continued cost pressures, while investment in infrastructure, defence, AI and energy could create opportunities for UK-listed companies, particularly if it succeeds in crowding in private capital. For the banks, the additional surcharge is unwelcome, but importantly it is temporary rather than a permanent increase in taxation. Ultimately, UK companies need policy stability and confidence to invest. This budget contains some targeted tax increases, but its emphasis on investment and easing costs for households and businesses makes it a relatively measured outcome for UK equities. The test now is whether that translates into stronger investment and growth."
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