UK Government's Fiscal Statement: Economist, Analyst and Other Views

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The UK government appeared to exacerbate losses for markets in London on Friday following a budget-like announcement from Chancellor Kwasi Kwarteng that has drawn much comment from economists, analysts and others.

Chancellor Kwarteng announced a Government Growth Plan to parliament that formalised recent policy announcements including the Energy Price Guarantee, although there was also a significant package of tax cuts and reforms included in the budget-like policy update.

Friday's package was followed by a separate announcement from the UK Debt Management Office, an executive agency of HM Treasury, informing the market that it would now look to raise a total of £234.1BN from investors for 2022.

Government bond yields surged just more than 10% as bond prices fell steeply in the immediate aftermath of the announcement while Pound Sterling pulled ahead of all other currencies in a market-wide retreat from the U.S. Dollar.

These price moves came amid heavy losses for stock markets and other risk assets across the globe, although London markets were leaders of the loserboard ahead of the weekend.

Meanwhile, analysts, economists and others were contemplating aloud what the announcement ought to mean for the economy and financial assets up ahead.

Below are reactions from a selection of analysts, economists and some small businesses, presented in no particular order.

Daragh Maher, head of FX strategy U.S., HSBC

"For GBP, the reaction function was always going to be determined by a battle between the cyclical and structural effects."

"On the cyclical front, the fiscal easing could boost demand and temper the currency market’s recession fears. A fresh record low in consumer confidence data released overnight suggests the support is timely." 

"But marked GBP weakness this morning suggests that any cyclical support for the currency from the fiscal impulse is being out-weighed by concerns over the sizeable burden these plans will put on government finances. With the UK’s external balance already falling sharply (the core balance is running at close to 8% of GDP), the “twin deficits” structural bearish case for GBP is growing."

"We continue to look for further GBP-USD downside."

Antoine Bouvet and Chris Turner, rates and FX strategists, ING Group

"The updated DMO remit for FY2022-23 includes an extra £72bn of borrowing, £10bn in T-bills and the balance in gilts. In our view, this is well within expectations but the current environment isn’t favourable to gilt sales."

"The cost of the newly-announced measures is reported to be £160bn over five years but, with the cost of the energy price guarantee highly dependent on wholesale energy prices, investors are worried the Treasury has effectively committed to open-ended borrowing."

"Bond holders are already rattled by inflation and by the prospect of more Bank of England (BoE) hikes. Even if the central bank hiked only 50bp yesterday, compared to market pricing of 75bp, markets are betting that the pace of hikes will have to accelerate."

"The recent jump in yields implies that Bank Rate will peak next year well above 5%. That in itself is not a great backdrop for bonds but what has rattled investors is the prospect of the BoE hiking more in response to generous fiscal policy."

Kallum Pickering, senior UK economist, Berenberg

"While the tax plan is not without risks and the fine print of supply side reforms will matter, the broad strokes of the government’s ‘Growth Plan’ look positive."

"While the policies will likely support trend growth a little, they will raise borrowing. Based on the government’s own estimates, the policies will require around 3% of additional borrowing in 2022 and around 1-1.5% of additional borrowing per year thereafter."

"Actual additional borrowing will likely be higher, in our view."

"The UK economy is still growing rapidly in nominal terms. This is down to the fact that households need to spend much more than before on energy and food – which are a highly inelastic goods. But part of the inflation surge is down to strong domestic demand. Thus, if spending continues to pace ahead but energy costs level off, there is some risk that inflationary pressures could emerge more strongly in other parts of the economy."

"To mitigate such risks, the benefits should have been focused on the bottom income deciles and scaled down considerably for better off households."

Simon Harvey, head of FX analysis, Monex Europe

"At today’s mini-budget, newly appointed Chancellor Kwasi Kwarteng announced a substantial easing of fiscal policy that awoke the bond vigilantes and sent the gilt curve substantially higher, led by the front-end."

"Volatility in the pound was primarily driven by ex ante expectations of the budget, and then the subsequent tantrum in rates markets following the announcement of a $62.4bn increase in gilt issuance from the Debt Management Office."

For the Bank of England, who yesterday tentatively hiked 50bps as they digested the Treasury’s growth stimulative plans, the case for a 75bp hike at a minimum in November has grown considerably."

"With income taxes also cut, the risks of a 100bp rate hike have now grown."

Samuel Tombs, chief UK economist, Pantheon Macroeconomics

"In one line: Tax cuts for the wealthiest won’t boost growth much; watch out for future spending cuts."

"All told, we believe that the economic outlook has not been transformed by these tax cuts, and the MPC needn’t raise Bank Rate to the near-5% level currently priced-in by the overnight index swap market."

"The government will need to focus much more or policies to boost labour supply if it is to have any chance of hitting its target of raising the economy’s trend growth rate to 2.5% per year."

 Andrew Aldridge, partner, Deepbridge Capital

"The new Chancellor’s overt commitment to the Enterprise Investment Scheme and Seed Enterprise Investment Scheme could well be the single most important decision he takes during his time at 11 Downing Street."

"These world-class propositions are fundamental to the creation of the innovative companies of tomorrow.  Particularly within our specialist sectors of disruptive technology and life sciences, EIS and SEIS are key in ensuring the UK is globally recognised as one of the best places to start and scale business."

"Being a leading EIS and SEIS fund manager, we are naturally delighted that any shred of doubt has been removed for investors and entrepreneurs."

Laura Foll, UK equities portfolio manager, Janus Henderson

"The recently confirmed cancelling of the corporation tax rise that was due to come in next year will mean a boost to expected future earnings for many domestic UK businesses."

"This earnings benefit will come at a welcome time when, given the uncertainty of the economic backdrop, there are ‘question marks’ about earnings capability in 2023 and beyond."

"This boost to expected earnings could well provide a ‘cushion’ for companies at a difficult time when costs are in many cases continuing to rise and the demand outlook is uncertain. Further tax incentives on capital expenditure for businesses are also welcome at a time when business investment in the UK has been low for several years."

Ion Fratiloiu, chief commercial officer, Channel Capital

“Small businesses are the backbone of this economy, and yet for too long now, the deck has been stacked against them, to the point where the cost of doing business is proving fatal for many."

"Given the severity of the economic forces at play, it is perhaps unsurprising that a bolder stance has been taken in today’s mini-budget towards providing some immediate relief to businesses and helping then reduce their burden."

“While these measures represent a step in the right direction, a longer-term strategy and wider support will be needed to help SMEs combat the mounting challenges threatening their survival."

"At a time when business leaders are struggling to absorb the impact of record inflation and soaring energy costs, more needs to be done to address the critical funding gap facing small businesses today."

Neil Wilson, chief market analyst, Markets.com

"Bond vigilantes were only ever biding their time. The reaction in the bond market to the misnamed mini-Budget (it was anything but mini!) is striking with yields surging after the chancellor unveiled sweeping tax cuts that abandon any semblance of fiscal discipline. It means more borrowing and more borrowing costs. This is not the reaction any chancellor wants from a budget but what else could he expect?"

"A fire sale of UK assets; absolutely horrible to watch. Weak handover to the US (10yr Treasury yield also up to highest since 2010 this morning) seems likely to weight on Wall Street. And sterling reacting with sub-optimal pessimism to the fiscal event with a fresh 37-year low with a 1.10 handle. And it’s not just a dollar move – see EURGBP."

Elliot Weston, tax partner, Hogan Lovells

"Overseas investors looking to invest in UK assets do look at the headline rate of UK corporation tax when they model financial returns, so keeping it low can have a marketing benefit for the UK."

"However, tax policy in the UK has increasingly been driven by international tax considerations [such as the proposed 15% multinational top-up tax, known as Pillar Two, and other tax changes arising from the OECD’s Base Erosion and Profit Shifting project] it will be a challenge for the Chancellor to make more radical changes to the UK tax system which would reverse the tide of complex tax rules which have arisen from international tax policies."

David Gregory, associate, Charles Russell Speechlys

“The Chancellor has today announced that businesses in designated areas in newly created ‘Investment Zones’ will benefit from 100% business rates relief on newly occupied and expanded premises, albeit it is currently unclear how far-reaching and long-lasting this exemption will be."

"However, the Chancellor appears to have stopped short of increasing the threshold for small business rates relief, meaning existing occupiers will be largely unaffected by this announcement."

"This is likely to be a blow for small businesses who were hoping for additional support at a time when high inflation is leading to higher rates."

"Overall, this is a step in the right direction, but further support for existing occupiers may be needed and, in the longer term, larger scale reform of the business rates system."