Laith Khalaf, Head of Investment Analysis at AJ Bell, comments: “This Budget was a bit like watching Match of the Day when you already know the scores. So many polices were leaked out in advance that the chancellor was left with a depleted squad of fresh announcements in the Commons. Then the OBR capped this off by publishing their economic report early. Most likely a fumbled mistake, but you could not make this stuff up. The chancellor might as well have stood up briefly at the despatch box and muttered, ‘Nuff said.’
“Irrespective of the actual changes introduced by this Budget, one has to question the way in which it was conducted. Rachel Reeves was absolutely right to limit fiscal events to one per year, but what she didn’t tell us is that the annual Budget would turn into a three-month saga, with the key protagonists trying to work out what the plot is. (More on leaking below).
A Budget aimed at pain now and relief later
“Overall the chancellor has used this Budget to raise taxes, to increase spending, and to build up a higher level of headroom against her fiscal rules. As a result, taxes are now forecast to rise to an all-time high of just over 38 per cent of GDP from 2029-30 onward. What’s more, around two-thirds of the increasing tax take since 2019-20 comes from rising personal taxes. The pips are squeaking, and so are the Smiths and the Joneses.
“The massive black hole in the Exchequer predicted by some didn’t materialise, which itself is a salutary lesson in the accuracy of economic forecasting. The OBR’s numbers show the current budget was projected to be in surplus by £4.2 billion in 2029-30, meeting the chancellor’s primary fiscal rule. Leaving just £4.2 billion of headroom might seem unthinkable, but then again, increasing it to £22 billion only raises the chances of meeting the target from 52% to 59%, according to OBR figures. The upshot is the chancellor didn’t have to do too much to balance the books, but she chose to. Admittedly some of today’s decisions had already been made since the last Budget, namely dropped changes to winter fuel allowance and health-related benefits. But many tax and spending polices have been layered on top.
“The decision to use taxation to increase her fiscal headroom means the chancellor is taking some pain at this Budget, in the hope that she won’t have to play the pantomime villain next year. Let’s hope that proves to be the case, but the odds haven’t shifted that far in her favour.
Economic growth
“As billed the OBR has cut productivity growth forecasts, to the tune of 0.3 percentage points. Overall economic growth has been revised down going forward, but from a higher base, reflecting stronger performance this year. So overall the economy isn’t lurching one way or the other from its lumbering path. As for this Budget, it barely makes a dent on economic growth.
“The OBR reckons that Budget policies temporarily boost demand by 0.1 per cent next year but have no significant impact on output by 2030. So much for a chancellor laser-focused on growth. This was a Budget aimed at increasing the Exchequer’s financial resilience while paying for welfare increases, at the cost of taxpayers. Reeves may well have laid a better foundation for next year’s Budget, if macroeconomic forces don’t prove to be a headwind. However, while bolstered, the chancellor’s headroom is still small in public spending terms, so it would only take a gentle breeze to blow her off course again.
The coast is now clearer for interest rate cuts
“As well as balancing the books and creating economic growth, this Budget will be judged on whether it helps to dampen inflation. A few weeks ago, Reeves took to the airwaves in an unusual pre-Budget public statement, and one of the key messages from that statement was a commitment to bear down on inflation. This is absolutely the right thing to do because lower inflation would allow the Bank of England to cut interest rates and ease the cost of living. That would give consumers and businesses a much-needed shot in the arm, and reduce the enormous cost of servicing government debt.
“From an inflationary perspective, the rise to the minimum wage isn’t helpful, though clearly some good news for lower paid workers. However, the cut to household energy bills means that overall this Budget reduces inflation by 0.3% next year according to the OBR, so the coast is clearer for a loosening in monetary policy. It’s now over to the Bank of England to deliver on that score. The Bank is already widely expected to deliver a Christmas rate cut in December, but the Budget’s dampening of inflation should pave the way for more cuts next year.
What the bond market thinks
“Initial reaction to the Budget was some swings in the gilt market as investors tried to digest a whole lot of OBR data that caught them on the hop because it was published ahead of the scheduled time. However early signs are yields are drifting down, but only a touch. Given what’s happened at previous Budgets that’s actually a pretty good result, so at least one group of stakeholders is happy.
“Breakeven rates were not much changed, which suggests market expectations for inflation have not been hugely shifted by the Budget. That may be because falling inflation was already in the price, or perhaps the bond market is still digesting the data.
Budgets are getting leakier at a worrying pace
“Reeves reportedly told Labour MPs that the Budget leaks had been incredibly destabilising, which implies she didn’t approve them. It seems improbable that so many leaks came out without a nod from the top, especially as the press briefing on raising income tax revealed the government was considering breaking one of its manifesto promises. But giving the chancellor the benefit of the doubt, at the very least she is presiding over a department that appears to have the retentive powers of a tattered sieve, and seems to want to conduct a mass focus group for policies via the media.
“Flying policy kites ahead of the Budget is not a new phenomenon, and has been implemented by both blue and red chancellors. However, the scale of the leakage appears to be growing at a worrying pace, somewhat at odds with the promises made by Keir Starmer in his first speech as prime minister to ‘end the era of noisy performance’ and to ‘tread more lightly on your lives.’
“In the short term, the briefing that an income tax rise was on the cards may have lowered government borrowing costs and led to better fiscal forecasts from the OBR, ironically perhaps even eliminating the need for the hike. But the subsequent withdrawal of the policy before it saw the light of day saw bond yields rising again, and with them a lack of confidence in economic decision-making.
“More broadly the constant stream of Budget policy proposals has left consumers and businesses overwhelmed, anxious and stupefied, and that may well be borne out in poor economic performance when Q4 GDP figures are released. In 1947, the chancellor Hugh Dalton resigned for offhandedly revealing key Budget details to a journalist. That feels a world away from where we are today.”
|
