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Britain’s October 28 budget comes amid rising global borrowing costs, elevated energy prices and a shrinking fiscal buffer. Investors are watching for tax increases on banks, housing support measures and signals of fiscal discipline.
Britain’s new finance minister, John Healey, is preparing to deliver his first budget on October 28, with financial markets closely monitoring the government’s plans to manage public finances amid rising borrowing costs and higher energy prices linked to the Iran war.
The budget is expected to test investor confidence in Britain’s fiscal policy, with government bond yields, sterling, bank stocks, housebuilders and utility companies among the key sectors in focus.
Markets are looking for reassurance that the government can comply with its fiscal rules without resorting to significant tax increases. Analysts warn that any perceived weakening of fiscal discipline could push borrowing costs higher.
Britain’s fiscal position has come under pressure following a global bond selloff that briefly pushed the yield on 30-year government bonds, known as gilts, above 6% in October. The rise in borrowing costs has reduced the government’s fiscal headroom — the amount of room it has to meet its fiscal targets — from £24 billion in March to an estimated £8.5 billion to £16 billion, according to economists.
Higher debt-servicing costs have narrowed the government’s options as it seeks to balance spending commitments with fiscal rules. Investor sentiment has received some support from relative political stability, improving economic data and the Bank of England’s decision to pause gilt sales. However, analysts say the budget will be a crucial test of the government’s credibility in the bond market.
More from BusinessThe British pound has remained relatively resilient ahead of the budget, trading near a 16-month high against the euro.
Foreign exchange options markets suggest investors are not treating the budget as a major immediate risk event. However, analysts caution that confidence could weaken if the government adopts unconventional borrowing arrangements or fails to provide a credible fiscal outlook.
The market remains mindful of the turmoil triggered by former Prime Minister Liz Truss’s 2022 mini-budget, when unfunded tax-cut announcements sparked a sharp selloff in British government bonds and sterling.
British banks are facing renewed scrutiny as the government explores ways to raise additional revenue without imposing broad-based tax increases. A possible increase in the bank profits surcharge has emerged as a key concern ahead of the budget. The Guardian reported that Healey was preparing to tax banks to generate additional revenue.
Banks currently pay a 3 per cent surcharge on profits. Analysts have suggested the government could raise it by two to three percentage points or restore the previous rate of 8 per cent. The surcharge currently generates just over £1 billion annually.
British housebuilders could benefit from measures aimed at improving housing affordability and supporting first-time buyers. The sector rallied in late September after the government confirmed plans for a new first-time buyer support scheme in the October budget.
The proposed measures raised hopes of a recovery in housing demand and a potential re-rating of housebuilder stocks. However, rising mortgage rates have since eroded those gains, keeping affordability concerns in focus.
Investors will look for details of the proposed scheme and whether it can meaningfully stimulate home purchases.
