Budget 'kicks the can down an ever-shortening road' on public spending

Wednesday’s nothingburger of an Autumn Budget was taken in its stride by both the pound and gilts.

This was a budget clearly designed not to rock the boat, and on that score it succeeded.

The partial rebuilding of fiscal headroom to £15bn should satisfy the bond vigilantes for now. However, at roughly 0.5% of GDP, the buffer is modest by historical standards and won’t fully dispel fears of further tax rises down the road. Tax and spending measures were small and targeted, with a higher tax burden on banks used to fund modest energy support for households.

We see nothing in the budget that will materially move the needle on growth or inflation.

If anything, the outlook has darkened, with the OBR slashing its 2027 growth forecast to 1.0% from 1.6%, largely a reflection of the energy crisis.

The good news for markets is that the UK is taking steps towards fiscal consolidation, and the government remains on course to narrow the budget deficit in the coming years, which would be a real fillip for sterling and gilts if delivered. The problem is that this deficit reduction is set to be driven by fiscal drag rather than spending cuts.

There was nothing in the budget to tackle the ever-growing public spending bill beyond a vague promise to address it at a later date. We see this as kicking the can down an ever-shortening road.

With only a thin fiscal buffer, welfare reform deferred and no clear answer on how higher defence spending will be paid for, we think that GBP could be exposed if growth disappoints or energy prices stay higher for longer. The Bank of England will be meeting on Thursday, but more on that from us early next week."