Such is the relationship between fiscal decision-making and the reaction of markets these days that finance ministers are loathe to spring nasty surprises on financial markets when announcing their budgets. No doubt Kwasi Kwarteng’s ill-fated “mini” budget was an exception that proved the rule, but, if anything, that only served to increase the need for a “safety first” approach. Thus, the government carefully laid a trail of breadcrumbs in the weeks leading up to the latest announcement, meaning that investors were already well fed with information about higher taxes and reduced spending.
The background to the Autumn Statement was hardly uplifting. The previous week’s GDP data showed that the UK economy shrank during the third quarter, and subsequent inflation data revealed consumer prices to be rising at their fastest pace since the early 1980s. But it says something about the level of investors’ expectations that both the pound and the Gilts market took both sets of data in their stride. It is these two financial barometers that are most closely watched as indicators of confidence in the stewardship of the economy.
The Chancellor’s opening words were to acknowledge the efforts of the Office of Budget Responsibility (OBR) and to outline its forecasts. We were not especially surprised to hear that the OBR believes that the UK is already in recession, but there was a stark reminder that the worst of its effects are yet to be fully felt. Whereas the unemployment rate remains near the low point of the cycle, it is forecast to rise to 4.9%. We have often observed in the past that the fortunes of the housing market are highly dependent upon the interaction of employment and interest rates. With the Bank of England set to continue raising rates and unemployment rising, there will be little respite for the housing market for the foreseeable future, although previously introduced Stamp Duty cuts will remain in place until 2025.
The Chancellor then set out his plans to balance the country’s books, announcing a fiscal consolidation of £55bn, with slightly more than half of the measures coming from spending cuts and a little less than half from increased taxes.
All in all, this was a confidently delivered Autumn Statement, one that had been well tested beforehand and one which consequently held little by way of surprise....The equity market overall is following other indices around the world lower, suggesting that investors see nothing in this statement to change their existing views relative to other markets.
From an investor’s perspective, the main news concerned a reduction in the dividend allowance from £2,000 to only £500 over the next two years. Expectations had been for a cut to £1,000. More surprising was a drastic cut to the Capital Gains Tax allowance. This currently stands at £12,300 but will fall to £6,000 next year and to £3,000 in April 2024. We had been fearful in the past that these sorts of measures would be enacted by a Labour Government under Jeremy Corbyn. The fact that they are being proposed by a Conservative government only serves to emphasise the size of the hole that needs to be filled.
As expected, windfall beneficiaries of higher energy prices were subjected to a levy on excess profits, despite intense lobbying from the energy industry. We are not surprised by this.
In terms of the cost savings side of the equation, there were no great surprises either. In fact, there is some fiscal easing in the next two years (conveniently ahead of an election) with the cuts back-end loaded. This might exert some pressure on the Bank of England to keep raising interest rates in the short term. Any thoughts of abandoning the pensions “triple lock” were kicked firmly into touch, and the cost of funding these increases was put at a hefty £11bn.
Indeed, the Chancellor did his best to deflect attention away from specific cuts by focusing on the outlook for the government’s growth priorities, which cover energy independence, infrastructure and innovation. To support these aspirations, he announced the relaxation of Solvency II regulations which will free up more capital from the insurance industry for investment purposes.
One little, yet important, detail was that the Debt Management Office (using the OBR’s forecasts) reduced its expectation for gilts sales this fiscal year from £194bn at the time of the “mini” Budget to £169.5bn. A survey of bond-trading banks undertaken by Reuters had suggested a figure of £185bn.
All in all, this was a confidently delivered Autumn Statement, one that had been well tested beforehand and one which consequently held little by way of surprise. The 10-year Gilt yield rose back to its highest levels of the day (3.22%, with a low during the speech of 3.14%), but this is against a background of similar rises in bond yields in other countries and so would not appear to reveal any specific dissatisfaction on the part of investors. The pound was a touch lower against the euro and the dollar, but well within the treading range of the previous three days. Indeed, it might have been due a pause after a strong bounce from recent lows.
We note a small rise in the shares of UK banks as the bank tax surcharge is cut from 8% to 3% but remember that the overall tax level will remain the same because corporation tax is set to rise again. The threshold for paying the levy was increased from £25m to £100m.
The equity market overall is following other indices around the world lower, suggesting that investors see nothing in this statement to change their existing views relative to other markets. That will have been exactly what the Chancellor and the Prime Minister would have wanted, given that they had no real capacity to spring a positive surprise. But let us not forget that the next few months, if not longer, will continue to be a very tough period for the UK economy.
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