UK Autumn Budget Signals Fiscal Expansion
On October 30, the UK government announced the Autumn Budget. The highly anticipated budget pits the political priorities of a new Labour government against narrow fiscal space. In our third Focus on Fiscal article, we discuss the UK government’s objectives with its fiscal program, its likely impact on policy, and importantly, what this means for markets and investors. In sum, we see a short-term boost to the UK economy, alongside elevated medium-term risks that justify a higher term premium for UK assets, as well as a tailwind for the pound.
New Fiscal Rules and Budget
As part of the Autumn Budget, the government unveiled two new fiscal rules: a balanced current budget and a move to decrease government debt as a share of gross domestic product (GDP)—both cited as medium-term goals. The first rule requires the government to fund current spending out of existing revenues (but allows for borrowing for investment). The second aims to limit overall indebtedness.
Broadly, the new rules materially depart from the ones they are replacing, which reflect both practical needs and longstanding criticism of the fiscal framework. The budget rule is more narrowly focused on day-to-day finances.1 The debt rule is similar to the last one, except that it targets a broader measure of debt,2 which allows for greater room to borrow (for investment, as per above). The new rules also take a nearer view of “medium-term,” i.e. three years instead of five. The rolling nature of the target still makes it possible for a government to meet the rules by assuming fictitious future tax and spending plans. However, the tighter time frame narrows the scope for fiscal manoeuvring.
In line with the newly announced guidelines, the government announced a new budget which includes a £70 billion rise (~2% of GDP) in government spending every year on average. Around half of this increase will be funded by new taxes, two-thirds of which will come from employers’ national insurance contributions (NICs).4 Across all measures, this announcement is a clear fiscal expansion with implications for the economy and markets.