- The UK fiscal budget main political implications: The budget is designed to improve public finances, regain market trust, and help the Conservative government regain some ground ahead of the next election. However, ultimately, investor confidence in the UK has been shaken because of the volatile political environment that has persisted since the Brexit referendum and that has accelerated in recent months. That will be much more difficult to achieve for PM Sunak and his Chancellor, given the deep divisions that run through the Conservative party. Growing voter dissatisfaction and party infighting through 2023 is likely to lead to early elections, meaning political uncertainty will remain at the heart of investor concerns for some time.
- Main market implications: The budget offered no major surprises for markets participants. The scale of fiscal consolidation and most of the announced measures were in line with expectations and UK assets didn’t react in a disorderly manner. Restoring credibility was the government’s main goal and what was announced alleviates part of the risk premium attached to UK assets. Investors’ focus though may rapidly shift from UK fiscal responsibility to the UK growth and inflation mix, therefore suggesting it may be too early to start repositioning towards the country. Regarding rates expectations, the fiscal budget is not a game-changer and we continue to expect interest rates to peak around 4.5%. Concerning sterling, the correction may be over as the political premium dissipates, but we don’t yet see catalysts for an outperformance of the currency. In Equities, in local currency terms, the UK market has been one of the best performing equity markets this year to date. The UK market offers an interesting profile for large stocks, high dividend and a defensive sector profile that is interesting in times of stagflation.
What are the political and social implications of the UK budget?
This was as much a political budget as it was a budget to improve Britain’s public finances. The overall aim was to regain the trust of markets and to improve the chances of re-election for the Conservative party. Forcing voters to tighten the belt now, and hoping this will cause inflation, and interest rates, to fall could allow the Tories to claim credit for the improved economic environment and offer tax cuts ahead of the next election.
It was noteworthy that the Tories doubled down on supporting their key voter base, pensioners, by committing to raising pensions in line with inflation. Confirming more spending for ‘levelling up’ and increasing taxes on high income earners also highlights that the Conservatives are still targeting former Labour ‘red wall’ seats in left behind areas that switched to the Tories at the last election, but have since been increasingly disgruntled with the party.
By increasing spending for schools and the NHS, the Conservatives are trying to assuage their core middle-class voter base which is concerned with the deterioration of public services.
The social impact of the budget is less clear at this point. While tax increases will be felt across the board, the government has also announced various measures to support those hardest hit by the cost-of-living crisis. Overall, this budget has the potential to help the Conservative regain some ground ahead of the next election.
Will it improve the UK’s reputation with financial markets?
Yes, for now it should. The spending cuts and tax increases will help the government regain trust it lost over the recent ill-fated ‘mini-budget’ of PM Rishi Sunak’s predecessor, Liz Truss. Fiscal restraint and monetary policy aligning with fiscal policy will alleviate concerns over the direction of the UK’s finances and economic outlook.
However, ultimately, investor confidence in the UK has been shaken because of the volatile political environment which has persisted since the Brexit referendum and accelerated in recent months. Three Prime Ministers and four Chancellors in one year is not something that calms market anxiety. Therefore, at least as important as fiscal responsibility will be to restore trust in British politics. That will be much more difficult to achieve for Sunak and his Chancellor given the deep divisions that run through the Conservative party. Growing voter dissatisfaction and party infighting through 2023 is likely to lead to early elections, meaning political uncertainty will remain at the heart of investor concerns for some time.