The UK's big-swing budget

UK Chancellor of the Exchequer Rachel Reeves presented the eagerly awaited Autumn Budget to Parliament this week; the first under a Labour government in 14 years. 

In her speech, Reeves outlined the government’s plans to raise taxes, spending and borrowing, pointing to “not just broken public finances, but broken public services” inherited from the former Conservative government. 

Reeves laid out over £40 billion worth of tax rises to address the financial shortfall, more than any budget has raised in at least half a century. This will include increases to inheritance tax and employer national insurance contributions. 

The Office for Budget Responsibility published updated forecasts for the UK’s economic and fiscal outlook after the meeting, where it revised its growth and inflation forecasts upwards. The watchdog now expects the economy to grow to 1.1% this year and to 2% in 2025, moderately higher than the previous forecast of 1.9% at the Conservative government’s last budget in March. Inflation is predicted to average 2.5% this year, 2.6% in 2025, before falling to 2.3% in 2026.

Markets chew the fat 

The cost of government borrowing jumped to a five-month high in the aftermath of the statement, while the pound experienced the biggest two-day fall in 18 months, as investors considered the scale of the Chancellor’s plans. 

“The outlook for gilt market’s outlook hinges on whether or not front-loaded spending will drive growth and inflation sufficiently to counteract lower taxes,” explains Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited.  

“This situation underscores the precarious fiscal positions many sovereigns face, where balancing the books leaves them vulnerable to changes in growth, inflation, and yields. The UK is far from unique in this respect,” Garvey adds. 

Financial institutions will play a key role in helping the government to fund the budget.

“Restoring confidence to the UK’s public finances, which would lower the cost of equity for financial institutions in the long run, was always a significant goal for the Chancellor,” says Filippo Maria Alloatti, Head of Financials for Credit at Federated Hermes Limited. “These changes suggest a shift towards a more flexible regulatory environment, emphasizing that we ‘don’t need the safest graveyard’.”

“In fact, the ongoing development of the motor financing sector is likely to have a more substantial impact on the financial industry than the budget itself,” he adds.

Markets remain volatile ahead of the US election next week, which is being closely watched by investors across the world. The Bank of England and US Federal Reserve decision on rates is also expected.