Budget 2020 - a view from the market

This article forms part of our wider Budget 2020 coverage including expert analysis of the tax aspects which can be found on our brand new hub.

Gauging the financial market response to the UK budget is unusually difficult this year. Ahead of the event, the first budget in almost 18 months, UK equity markets were responding to the latest news on the coronavirus. Towards the end of Rishi Sunak’s maiden outing as chancellor they were being driven lower by US investors’ concerns of apparent delays to the announcement of expected fiscal stimulus measures to counter the outbreak in the US.

Peering through the window between those two global forces, the judgement of financial markets seems to have been largely neutral – the FTSE100 and the more UK-focused FTSE-250 equity indices ended roughly where they had begun when he stood up to deliver the budget. Despite the undoubted political flourishes, there was little that had not been trailed in one form or another – with the notable exception of the even greater commitment to infrastructure spending: £175bn over five years and not the £100bn that had been anticipated.

While the budget speech was undoubtedly politically astute, it marked a distinct break with the fiscal orthodoxy of recent years including a significant increase in public debt which the OBR estimates will add some £100bn to the national total by 2024. Increasing national debt at a time of national crisis, such as that represented by the coronavirus outbreak, will likely raise few eyebrows. UK gilt yields actually fell back over the announcement having anticipated an even larger issuance; the UK debt management office announced gilt sales of £156.1bn for 2020/21, the highest since 2012/13 but still lower than analyst forecasts of £166bn.

But that leaves questions which may come back to haunt the government later in its term. If other tax raising measures fail to deliver their expected yield (£4bn+ in anti-tax-avoidance measures?) or the so-called ‘Brexit Dividend’ (no more contributions after the Divorce Settlement) is delayed or if the coronavirus epidemic spreads more significantly to test Mr. Sunak’s open-ended (“whatever it takes”) commitment to the NHS, then gilt issuance may have to rise back to levels originally anticipated by the markets, taking gilt yields with them.

This overview ends with one final wrinkle: the Office of Budget Responsibility, charged with making the official and independent forecasts of the UK economy, published its latest outlook this morning ahead of the budget statement. In it they said that they were, as always, required to submit their forecasts to the treasury by mid/end February which, on this occasion, meant before they knew of the intended emergency measures to be announced. As a result and in its own words “It is impossible at this point to give a reliable estimate of their fiscal consequences”. That uncertainty too could come back to haunt the Government.