The U.K. is experiencing a decline in business confidence, reaching its lowest point in 11 months. This is attributed to the sharp increase in government borrowing costs, reminiscent of the turmoil following former Prime Minister Liz Truss's controversial "mini-budget" in September 2022.
Despite these unsettling trends, analysts are optimistic that a market meltdown similar to the one experienced during Truss's tenure is unlikely. The International Monetary Fund (IMF) has raised its growth forecast for the U.K. economy to 1.1% for 2024, up from a previous estimate of 0.7%. This increase is seen as a stabilizing factor that could mitigate adverse reactions in the bond market.
The U.K. Labour government is preparing to deliver its first budget in nearly 15 years, aiming to address a projected £100 billion spending gap over the next five years. Finance Minister Rachel Reeves plans to revise the U.K.'s debt rules, potentially unlocking billions for investment. While specific details are not yet known, it is expected that the government will focus on public sector net financial liabilities (PSNFL) as a measure of debt. This broader approach could increase the government's fiscal headroom by approximately £50 billion.
Reeves is anticipated to rely on tax changes to bridge the spending gap, with a focus on avoiding tax increases for "working people." However, adjustments affecting higher earners and employers may be on the table. Speculation suggests that tax changes may target individuals with shareholdings and consider extending the freeze on personal income tax thresholds. Changes to inheritance tax and capital gains tax are also being considered.
Analysts have mixed opinions on the anticipated measures, with some highlighting the delicate balance Reeves must strike in managing public finances while promoting growth. The government will likely need to raise approximately £25 billion annually to meet its spending targets. However, caution has been advised against measures that could hinder business growth and undermine the government's growth agenda. The Labour government is under pressure to deliver a budget that addresses fiscal challenges and instills confidence in the economy.