Fiscal Insiders: UK Autumn Budget Special

Welcome to Fiscal Insiders: UK Autumn Budget Special. Here we take a look at what we can expect from Labour’s first Autumn budget on 30th October. Here’s our portfolio manager Chris with everything you need to know.

FISCAL INSIDERS: UK Budget

When is the UK budget taking place? 

Chancellor Rachel Reeves will deliver Labour’s first Budget in 14 years on Wednesday 30 October. The Budget speech usually starts at 12:30 UK time and lasts about an hour. 

She has already warned that it will involve “difficult decisions” on tax, spending and benefits. We are expecting an increase in inheritance tax, and capital gains, alongside the unpopular decision to cut winter fuel allowance for pensioners

Prime Minister Sir Keir Starmer told the BBC the “tough” Budget will “focus on rebuilding our country”.

How is the UK Economy currently doing? 

The UK economy is doing well considering we fell into recession at the end of last year. We’ve seen a great turnaround in GDP growth this year so far. The UK fell into recession with two consecutive quarters of negative growth. However, it rebounded strongly in the first three months of the year, when GDP increased by 0.7%, and this was followed by 0.5% growth between April and June.

Furthermore, inflation is reading well below the 2% target from 11% for the BOE (1.7% reading last week). House prices are continuing to also be robust in a tough climate, but as interest rates get priced in, home buyers are increasing.

Unemployment is at 4% which is just off the lowest rates seen since 1974 (hit in August). The IMF just this week have raised its forecast for economic growth for the UK too. The UK pound is still one of best performing currencies of the year out of the G10 – the economic recovery has been a key factor in this, up over 5% vs USD, near 4% vs EUR, the political stability has also been an attractive prospect for Sterling investors.

What can we expect to be in the Budget? 

Employers may face potential increases in National Insurance contributions as part of the government’s strategy to boost revenue. While no major overhaul is expected, adjustments may be made to thresholds or rates to address funding gaps in public services, including the NHS. The focus will likely remain on balancing the burden between businesses and maintaining employment.

There could be changes to CGT as part of the government’s effort to increase tax revenue from wealthier individuals. This might include reducing tax-free allowances or increasing rates, particularly for higher earners. Investors may be impacted, especially in the property and stock markets, though any changes are expected to be carefully balanced to avoid deterring investment.

Reforms to pension taxation may aim to incentivise long-term savings while ensuring wealthier individuals contribute more. There could be a focus on tightening annual and lifetime allowances or making changes to pension relief for higher earners. Any shifts will likely be designed to protect lower-income savers while aligning tax relief with fiscal goals.

The non-domiciled tax status could come under increased scrutiny, with the government looking to reform or limit the advantages offered to long-term UK residents. Changes could involve stricter rules on how long someone can claim non-dom status or higher taxation on foreign income. However, the government may balance reforms carefully to avoid discouraging wealthy individuals from residing in the UK.

An increase in gambling taxes could be on the agenda, as the government seeks to address concerns around problem gambling while generating additional revenue. This could involve higher duties on betting companies or adjustments to the tax regime for online gambling platforms. Any tax hikes will likely be paired with new regulations aimed at protecting consumers.

After several years of freezes, the government might revisit fuel duty, potentially considering modest increases in line with environmental objectives. However, with the cost-of-living crisis and energy prices being key concerns for households and businesses, any increase would likely be gradual and carefully managed to avoid significant public backlash.

How might the budget impact the foreign exchange market?  

For the pound, the main influence of the budget will depend on whether there is a significant rise in government borrowing and tax increases. With a £40 billion deficit still in place, which Reeves has acknowledged since becoming chancellor, tax hikes—potentially through National Insurance, CGT, and inheritance tax—are expected to address this shortfall. Typically, tax increases are viewed negatively for the economy as they can reduce output, potentially leading to higher inflation, which adds pressure on the public and worsens long-term economic conditions. If Labour implements substantial tax hikes, sterling could face downward pressure.

How will potential budget changes affect currency risk management strategies and how can businesses prepare?   

As we saw during Liz Truss and Kwasi Kwarteng’s disastrous “growth plan” budget, the impact from the market can be serve. Sterling almost hit parity vs USD as a result. Hitting 1.0350 its lowest level since 1985 where unfunded tax cuts and increased borrowing sent jitters across the market.

Whilst we are not suggesting a repeat scenario, it’s important that businesses consider the impact the budget can hold over the Pound, from a risk management perspective, some business could consider hedging a portion of exposure ahead of the budget to ensure of a fixed price and provide comfort going into a period of potential volatility. With the budget being released over lunchtime next week it could also be worth speaking with one of our FX specialists to take advantage of any potential large movements via our market orders facility, where we can target a rate of exchange above current market value should prices rally higher.

Ultimately, how the pound reacts to the budget will come down to investors views on how the government is planning to keep fiscal policy tight, whilst trying to grow the economy. Working with FX specialists at Fiscal ensures your business has a reliable partner to navigate through unpredictable climate.

The pound’s runaway performance is in large part a rebound from a long stretch of underperformance in the years after the Brexit referendum in 2016, there’s plenty of reason that the strong form can continue as the ECB and FED cut rates more aggressive than that in the UK.

How can Fiscal FX help?

Our platform offers a market orders facility where we can target desired levels outside of UK core trading hours. This tool is fundamental when taking advantage of market volatility in a tough economic climate, our clients have seen significant profit margins off the back of this product when compared with their competition.

For those looking to help mitigate the risk of expected market volatility, then a forward contract may be the perfect tool, allowing you to lock in profit margins and fix your rates of exchange ahead of big political events. Our risk management solutions are one of the main reasons clients utilise our facilities, the ability to fix rates ahead of upcoming projects. Locking in profit margins and lowering the risk of FX losses. It is important to note, that as with any financial product, there is always a risk. Talk to our portfolio managers if you have any questions on using Forward Contracts for your business.

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