An anti-growth budget would be bearish for UK assets and drive losses in the Pound and gilts
There is almost unprecedented uncertainty surrounding this year’s Autumn Budget, making it an unusually important risk event for markets. Chancellor Reeves has a mammoth task on her hands as she attempts to convey to markets that she has a credible strategy to both boost growth and plug the hole in the public coffers.
Investors are clamoring for spending cuts, but any savings are likely to be minimal, and markets will punish the government if it breaks its self-imposed borrowing rules. Fresh tax increases are inevitable, but with Labour seemingly backtracking on its plans to touch income tax rates, we instead foresee a patchwork of smaller targeted revenue raisers.
The key will be whether Reeves is able to convey to markets that she has a credible plan to balance the books in a sustainable manner, while also promoting economic growth. An unveiling of only modest downgrades to the growth and productivity forecasts, combined with mild tax increases and a degree of belt tightening should be sufficient to do just that.
A perceived anti-growth budget that is tax heavy and lacking in clarity on a tangible strategy to restore fiscal equilibrium would be bearish for UK assets. Losses in the pound and gilts would be exacerbated by a recalibration in Bank of England policy expectations, as the MPC would likely react to an economically restrictive budget by slashing rates more aggressively.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
