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UK Budget: Survival on a fiscal tightrope - Westpac

Tim Riddell, Research Analyst at Westpac, explains that the key pressure on UK Chancellor Hammond into this Autumn Budget was more political, internally within the Conservative Party as well as more broadly after his last Budget was seen as somewhat of a disaster with key proposals having to be scrapped or materially changed.

Key Quotes

“This time he had to walk a political tightrope and apparent failure could lead to both his fall from his role as Chancellor and also threaten May’s already vulnerable leadership.
The principal challenge was how to steer a prudent fiscal path that remained close to the goal of bringing debt down to 2% of GDP into 2021-22 whilst managing to provide enough support to the most politically sensitive parts of the economy so that the current tensions within May’s minority Government would not be exacerbated.”

“Market Response:

The initial response of markets and pundits is that he has done enough:

  • GBP was contained to a mere 0.5% range during the delivery of the Budget and its moves afterwards were driven by other currencies, notably USD, rather than anything specific to UK/GBP
  • Gilt yields maintained a very tight range also
  • The Gilt curve barely moved and this was also reflected in the Sonia curve
  • Stocks actually mildly outperformed regional markets, drifting from an initial 0.5% towards unchanged mostly due to softer European stocks and a notable slide in Germany’s DAX in afternoon trading

Although the initial response is minimal areas that are likely to garner more interest will centre around the OBR (Office of Budget Responsibilities) forecasts, the path of borrowing reduction and whether DMO issuance will need to rise more materially than currently projected.”

“Key Information

  • Most in the markets expected a Budget of little macro interest and this is effectively what was delivered. The main areas of note from a macro point of view, and therefore immediately relevant for the international investor are the lowering of GDP forecasts, the path towards Budget reduction and near DMO issuance.  
  • GDP forecasts: lowered through the forecast period
  • Borrowing Path: Borrowing higher by around GBP29bn over the forecast period
  • Debt: The Debt Management Office (DMO) estimates that issuance for the current year to rise by only GBP900mn to GBP115.1bn and currently expect debt issuance to rise, due to Brexit, by GBP20.7bn to 151.6bn in 2019/20.
  • An extra GBP3bn has also been set aside to cover Brexit related costs over the next two years


  • This was billed as a likely dull Budget due to financial and political constraints and it turned out to be so.
  • Hammond managed to provide enough assuage discontent rather than create any real sense of well-being. Spending has been increased, austerity has been eased despite a lowering of growth, but there is still an acceptable path of borrowing reduction.
  • Markets have reacted accordingly with little real change in GBP and assets. 
    What will be critical is how the Tory Party react over the next few weeks, the ability to maintain DUP support for the minority Government and whether Brexit negotiations deteriorate. 
    Additionally, the impact on an already restrained consumer into the holiday season will be a notable factor for both growth and revenue.”

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