Rip up the rulebook? – Standard Chartered

The upcoming budget on 30 October could prove to be one of the most important in years. Further tax increases are likely forthcoming to ensure no major spending cuts are needed. We expect rule changes on the debt side to usher in a renewed focus on boosting investment. Gilt reaction will depend on how much borrowing headroom is created and how much of that is used, Standard Chartered’s analysts note.

Something borrowed, something new

“The UK budget on 30 October may prove to be one of the most significant of the last 20 years, partly given the state of UK public finances and also as it will be the first fiscal event of a Labour government in 14 years. But more importantly because the government looks intent on using it to usher in fiscal rule changes with a focus on boosting investment and economic growth. Fiscal headroom could be increased by changes to the debt measure and the time horizon that the government targets, while a commitment to borrowing only for investment, alongside reforms to public services, could shift the focus of government towards the longer term.”

“However, Chancellor Rachel Reeves will seek to avoid being overly bold, as memories of former Prime Minister Liz Truss’ mini-budget crisis of autumn 2022 linger. The recent rise in UK government borrowing costs is a timely reminder of the risks of losing market confidence and the need to secure a positive assessment of changes from Office for Budget Responsibility (OBR). Whatever increase to the fiscal headroom is achieved is therefore unlikely to be fully utilised.”

“In the near term, the government has largely hamstrung itself by ruling out hikes to more than 70% of the tax base. Moreover, mooted tax hikes elsewhere – such as VAT on private education and changes to the non-domiciled-resident tax regime – have come under scrutiny in terms of how much revenue they will raise. With a reported GBP 22bn fiscal hole in the 2024-25 budget, additional tax hikes will be needed to avoid significant real-term spending cuts for some government departments, potentially focused on capital gains, inheritance tax, pensions, and possibly the introduction of new taxes.”