UK Chancellor Rachel Reeves' Upcoming Budget

UK Chancellor Rachel Reeves is set to deliver the first Budget of the new Labour government on Wednesday. Analysts from UBS are highlighting key areas for investors to watch in this challenging financial environment.

Current Fiscal Situation

The government faces an overspending issue, forecasted to exceed March estimates by approximately £22 billion (0.8% of GDP). Limited room for additional spending under current fiscal rules persists, alongside the government’s commitment to enhance investment.

Key Aspects of the Budget

1. Changes in Fiscal Rules: Introduction of new rules aimed at increasing future borrowing capacity.
2. Tax Increases: Likely adjustments on capital gains, inheritance, pensions, and national insurance contributions.
3. Investment Spending: Additional funding for investment projects is expected.

UBS predicts that increased spending will likely lead to a revised deficit of 3.1% of GDP this year, with the fiscal stance remaining restrictive in the upcoming years due to announced tax hikes.

Treasury Goals

While the Treasury is shifting its goal from reducing the headline deficit below 3%, it aims for a balanced current budget by the fifth year of the Office for Budget Responsibility's (OBR) forecast. This change could free approximately £13.6 billion (0.5% of GDP) for departmental budgets.

Potential Adjustments in Debt Rules

No changes in the debt rule have been confirmed. Still, adjustments could release between £16 billion and £58 billion (0.6-2.1% of GDP) for capital spending, with UBS estimating a cautious £16 billion (0.6% of GDP) potential increase.

Avoiding Austerity

To prevent a return to austerity, the government would require £26 billion (1% of GDP) in additional funding, necessitating further tax increases given its commitment to not raise income tax, VAT, and corporation tax.

Expected Tax Increases

Tax hikes are expected to focus on capital gains tax, inheritance tax, pension-related taxes, a VAT increase on private schools, among others. An increase in employers' national insurance contributions could account for an estimated £9 billion (0.3% of GDP), while overall targets for added tax revenue remain uncertain.

Gilt Remit Changes

The gilt remit for 2024-25 is anticipated to rise, with estimates suggesting an upward revision from £278 billion to £292 billion, an increase of nearly £6 billion compared to previous updates. This decision comes as a response to the forthcoming Autumn Budget.