UK Borrowing Costs rise, Stocks Dip Amidst Budget Uncertainty
Concerns are mounting over the UK’s fiscal outlook as speculation intensifies ahead of the Autumn Budget on november 26th. Borrowing costs have risen,and stocks have experienced a downturn as investors react too the potential for tax increases to address a £30 billion ($39.5 billion) shortfall in the government’s budget.
The initial plan for a 2p reduction in National Insurance, intended to impact passive income streams, is now facing scrutiny. Experts suggest the budget gap may be filled through a series of smaller tax increases.
This approach could trigger a “fiscal reckoning,” according to Rory McPherson, investment chief at Wren Sterling. speaking on CNBC’s “Squawk Box europe” on Friday, McPherson warned that targeting smaller taxes, as proposed by Rachel Reeves, would likely increase pressure on the government to borrow more money, subsequently pushing up yields. He noted a recent “big march down” in yields is now being reversed.
Currently, long-term borrowing costs in the UK are at their highest level as the late 1990s, and the nation’s debt carries the highest price tag within the G7.
Toni Meadows, head of investment at BRI Wealth Management, described the government as being “between a rock and a hard place with regard to this budget.” She highlighted that inherited fiscal issues were exacerbated by public sector pay awards, and that any solution will likely be unpopular. “How can this statement together promote growth whilst having to cut spending and increase the tax burden to keep bond investors happy?” she questioned, also pointing to the pressure from outstanding debt and service costs.
Meadows added that the uncertainty surrounding the budget details is currently more damaging than the potential outcomes, emphasizing the need for detailed plans to allow investors to move beyond speculation.
Julian Howard, chief multi-asset investment strategist at GAM Investments, suggested potential measures could include “onerous restrictions” on pension savings, isas, an expatriation exit charge, and changes to capital gains and council tax.
McPherson of Wren Sterling believes the Bank of England will still retain the ability to cut interest rates after the budget, should it choose to do so. However, investor optimism regarding rate cuts has diminished, with bets shedding six basis points compared to Thursday, according to LSEG data.
Howard concluded that while the Chancellor will likely implement measures to address the immediate problem, the broader challenge may be one of maintaining overall economic credibility.
- CNBC’s Chloe Taylor and Sam Meredith contributed to this report.
