What to expect from the U.K. Autumn Budget statement

The yield on the 10-year gilt
TMBMKGB-10Y,
3.336%
was down by 1.1 basis points at 3.351% on Tuesday morning, but had shot up to highs of 4.514% after the mini-budget. The pound
GBPUSD,
+0.87%
was up 0.6% to $1.1829 on Tuesday. It flailed and hit historic lows below $1.04 after Kwarteng’s budget.

Here’s what to expect from the announcement on Thursday:

Tax rises

Hunt already told Sky News over the weekend that everybody in the U.K. will end up “paying a bit more tax,” and economists are valuing the tax rise to be around £35 billion.

“We will be asking everyone for sacrifices. But in a fair society, as we are in the U.K., there is only so much you can ask from people on the lowest incomes,” Hunt said on Sunday.

Deutsche Bank’s senior economist Sanjay Raja said the tax hikes will be in the form of stealth rises, meaning most likely freezes on tax-free personal income allowances and pauses on inheritance tax, pensions tax, and dividend tax at their current levels.

Reports also suggest Prime Minister Rishi Sunak and Hunt have been mulling lowering the additional tax threshold –- from £150,000 to £125,000 –- where the highest earners pay the highest rate of 45%. According to Hunt, “people with the broadest shoulders will bear the heaviest burden.”

Raja has anticipated rises in council tax and a hike in the “duration and scale” of windfall tax imposed on energy companies to siphon their profits, the latter of which could net £5 billion in revenue.

Economic recovery

“In truth, the biggest surprise in the Autumn Statement is likely to be the lack of any shock announcements,” said Giles Coghlan, chief market analyst at HYCM, adding that Hunt’s plans to lower the deficit shouldn’t cause volatility the markets on Thursday.

After official figures revealed last week that economy growth slowed down in the third quarter and the U.K. was expected to fall into a recession before the end of the year, Hunt has said his goal is to make the slump “as short and shallow as possible” by tackling the 40-year high inflation, which has battered U.K. households finances alongside high energy costs this winter.

Not everyone thinks it will be short and sweet though. The Bank of England said a couple of weeks ago that it expects the U.K. to remain in a recession throughout 2023 and the first half of 2024.

“Hunt needs to ensure that his plans to cut the deficit and control inflation don’t stunt economic growth by moving too quickly. Indeed, among G7 countries, the U.K. is the only one whose output sits below pre-COVID-19 levels,” Coghlan noted.

Bank of America analysts believe their forecasted 40/60 split between tax hikes and spending cuts will slow down economic recovery rather than worsening the looming recession.

“We see fiscal tightening as slowing the U.K.’s recovery from the forthcoming recession rather than deepening that recession,” they said in a note.

Spending cuts

Deutsche Bank analysts anticipate Hunt to announce between £20-25 billion in spending cuts made over the next five fiscal years.

These are also likely to be made as “stealth” cuts, i.e. making nominal cash freezes to government department’s budgets and “efficiency savings” made across the public sector, particularly in the public health service, the NHS.

Hunt, who has served as a former health minister, has addressed the possibility of cutting spending in the National Health Service, saying a lot of money is already pumped into the NHS.

“In the context where funding for the NHS is going up, we need to do everything we can to find efficiencies,” he told the BBC.

Interestingly, Pantheon economists Samuel Tombs and Gabriella Dickens think Hunt will seek £50 billion in savings by 2025/26, which they say following press reports from the weekend could be “a bit too severe”.

“What matters most for now—and especially for the MPC—is how much of the required fiscal tightening hits the economy in the upcoming fiscal year, 2023/24,” they said in a note.

“If the Chancellor had a free hand, he surely would wait until 2025/26 to implement most of the consolidation, to give the economy some breathing space now and to avoid spoiling his party’s chances at the next general election. But the gilt market likely will only view the plans as credible if concrete steps to reduce borrowing are taken next year,” they added.

Energy support

Reports suggest Hunt will announce a one-off extra handout to the most vulnerable to help with energy bills once the current energy price guarantee ends in April, expected to cost the government around £20 billion, Raja says.

Former Prime Minister Liz Truss’s energy price cap is still in force until April, which caps the average yearly household energy bill at £2,500, though Hunt may announce a rise to as much as £3,100.

 “We have to recognize that one of the reasons for the instability that followed the mini-Budget was that people were worried that we were exposing British public finances to the volatility of the international gas market. So, there has to be some constraints to it,” Hunt told the BBC.

Laura Hoy, ESG analyst at Hargreaves Lansdown, said the Treasury saved £260 million in October from the unusually warm weather due to less demand for natural gas for heating.

“Efficiency improvements could have a similar impact during the colder months, as it would lower demand. This underscores the growing need for efficiency improvements in the U.K.,” she said.