UK budget: Immediate reaction

The immediate market reaction has been mixed. The pound is weaker across the board, and GBP/USD is down below $1.2950. However, Gilt yields are falling sharply, and the UK’s Gilt market is outperforming Europe and the US on Wednesday.

The biggest points from the Budget so far include:

• £40bn of tax rises, which is more than the £35bn touted in the media this week.

• UK’s long term GDP forecasts are unexceptional, the peak rate of growth is 2% for 2025, before moderating to 2.6% in 2029. This is not much growth for £40bn in tax rises, which is why the pound is still under pressure. Also, the OBR does not think that the UK can reach Labour’s own GDP target of 2.5%, which always looked ambitious.

• Gilt yields have continued to fall as Reeves has started talking, this comes on the back of Reeves outlining the UK’s stability rules. The UK deficit is expected to fall sharply in 2025/2026, and the UK deficit could fall to 2.1% of GDP by the end of the government’s forecast period. This would make the UK quite the outlier, compared to the US and parts of Europe. Whoever wins next week’s US Presidential election, both candidates are expected to increase the US’s budget deficit. This could boost the attractiveness of UK Gilts, and yields remain lower on the day for now.

• At this stage, massive tax rises have not spooked financial markets, and instead expectations that the budget deficit will shrink is having a mollifying effect on UK bonds.

• Taxes: fuel duty will be frozen, national insurance is going up for employers only by 1.2% to 15%.

• However, the employment allowance has been increased, which negates some of the NI increase, so business owners are ‘working people’ after all.

• CGT increase: lower rate is raised to 18%, while higher rate is increased from 20 to 24%. This is a lot less than expected, and the pound is picking up on the back of this. It is also good news for UK stocks and removes much uncertainty that was fueling share sales.

• The FTSE 250 is at its highest level of the day, and the FTSE 100 is off its lows from the day.

Overall, this budget is not as bad as expected on the tax front. The CGT increase is lower than expected, which suggests that Reeves’ bite is not as bad as feared. However, the unexceptional growth forecasts from the OBR, may be higher than the BOE’s rate, but it does not suggest that the UK’s economy will expanding at a rate anything like the level that the US is expanding, in the coming years.