How Will UK Markets React To Tomorrow’s Autumn Budget?

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Tomorrow, UK Chancellor Jeremy Hunt will deliver his Autumn Budget, which he has warned will include tax rises and significant cuts to public spending.

His predecessor, Kwasi Kwarteng, has given him a difficult act to follow. When the mini-budget package was revealed to include a series of unfunded tax cuts on 23 September, the pound fell to a 37-year low against the dollar.

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"The last few weeks have seen UK gilt markets, as well as the pound, come under pressure over concerns about the sustainability of the UK’s public finances,” says CMC Markets chief market analyst Michael Hewson. “Since the change of leadership at the top of government, these concerns have abated, as has the pressure on the pound and gilt yields.”

Autumn Budget Outline

In the run-up to Hunt’s announcement, the Office for Budget Responsibility warned the chancellor that UK public borrowing is estimated to be £70bn more than expected. The UK fiscal watchdog had forecasted a budget deficit of £31.6bn in March.

The goal of this budget will be to reassure markets by demonstrating that this gap can be plugged — as evidenced in Hunt’s recent statements about “restoring stability” and “getting inflation down”. Hunt is expected to reveal spending cuts of £35bn and tax rises of up to £25bn to do this.

In addition to freezing tax thresholds to increase tax payments, Hunt is also reportedly looking at cutting the tax-free allowance for dividends and changing the dividend tax rate. An expansion on the windfall tax on energy firms is also expected.

“What is more concerning,” Hewson says, “is that the framing of the discussion hasn’t shifted at all in terms of convincing the markets that future spending plans will be properly scrutinised, compared with the damage that these measures will do to the economy.”

FTSE 100 Volatile

Ahead of the budget announcement, the FTSE 100 had a rocky start to the week. While it rose 0.9% on Monday, the index closed down 0.2% in the following session after new Office for National Statistics data revealed that unemployment had risen to 3.6% in the three months to September, up from 3.5% in Q2.

The share prices of oil and gas firms operating in the North Sea were also down, in anticipation that the Chancellor could increase the levy on their profits from 25% to 35%, and extend the period where this tax applies from 2026 to 2028.

“If implemented, this would increase the effective tax rate for UK profits from 65% to 75%,” Hewson explains. “The likes of BP plc (LON:BP) and Shell PLC (LON:SHEL) would probably be able to absorb [this] better due to their global footprint, but would be problematic for the likes of Harbour Energy PLC (LON:HBR) and Enquest Plc (LON:ENQ) who make the bulk of their profits from domestic sources.”

Gilts In Focus

The UK prime minister and his government “face an extraordinary balancing act”, Hewson says of the upcoming budget announcement. “He needs to appease financial markets with a package of spending cuts and tax increases, while also winning over disgruntled voters.”

Following the announcement, traders can look to gilts to take an initial temperature check of the markets. If 30-year gilts are sent upwards after the announcement, this could trigger a sell-off similar to what was seen after September’s mini-budget.

But if Hunt’s announcement does adequately assure investors that the UK is being positioned for growth, this sentiment will be seen in the form of rising equities. They have to “convince the markets that they have a credible long-term economic plan they can implement over a five-10-year period,” says Hewson.

For those who want to speculate on whether their values will fall and yields will rise following tomorrow’s announcement, spread betting can be an effective way to trade on bonds without holding them outright. Learn more about spread betting.