News & Analysis

Chancellor Jeremy Hunt took a much more orthodox approach to today’s Autumn statement following the disastrous mini-budget presented by his predecessor Kwasi Kwarteng at the end of September.

Paying homage to independent and credible institutions such as the Office for Budget Responsibility and the Bank of England, Chancellor Hunt took the early steps to try and restore investor confidence in the UK. He then sought to compound this throughout the Autumn statement as budget measures looked to fill the projected £64.2bn fiscal hole that had arisen in this year’s finances alone since March’s OBR projection with a fiscal consolidation of £55bn.

The Chancellor also reinstated fiscal rules, which will see debt-to-GDP fall by the fifth year of a five year rolling period and public sector borrowing over the same period stay below 3% of GDP.

While the measures announced largely fell in line with those drip fed to market participants this week, the overall consolidation efforts look much more back-loaded than initially suggested as a flurry of near-term support measures to the economy were also announced. The deficit reducing measures announced primarily focused on increasing tax revenues in the near-term, while limiting the growth in public spending over the later periods of the five-year projection. Some of the major measures announced include:

Higher taxes

  • Fiscal drag: personal allowance and other tax thresholds (income tax, national insurance, inheritance) will be frozen up until 2028. As the economy grows and wages rise, this will naturally lift more individuals into higher tax brackets. In combination with the highest income threshold being reduced from £150,000 to £125,104 is expected to raise £14bn.
  • Capital gains tax-free thresholds reduced from £12,300 to £6,000 in 2023 and £3,000 the year after.
  • Stamp duty cuts to be maintained until 2025 and then to be raised thereafter.
  • Dividend allowance to be cut from £2000 to £1000 next year, and then again to £500 the year after.
  • Windfall tax to be increased from 25% to 35% and extended from 2026 to 2028, as of January 1st 2023.

Lower public spending

  • An alteration in the original energy price guarantee such that the cap is raised from the current level of £2,500 to £3,000 from April 1st for the remaining 12 months of the scheme. £900 payment to those on means tested benefits and £300 to pensioners.
  • Cut in the aid budget from 0.7% of GDP to 0.5%.
  • Cap increase in social benefits at 7% per year.

Sterling falls after Hunt announces bleak OBR projections, decline is extended thereafter on broad USD rebound 

Despite the swathe of measures announced in today’s budget, the economic spectacle had a very limited lasting effect on GBP assets.

Although the announcement of the OBR’s bleak economic projections initially sent sterling close to a percentage point lower as gilt yields rallied, the moves earlier in the day soon began to retrace as the consolidation measures were reeled off by the Chancellor at a rapid pace.

The main takeaway from today’s budget was that it exposed the bias of traders to sell the pound at current levels.

While this bias was visible earlier this morning, it was put on full display as the OBR’s projections reiterated the UK’s weak economic fundamentals. We favour fading the recent GBP rally further towards 1.15. Following the budget, hawkish commentary from FOMC member James Bullard extended losses in GBP below 1.18 as the broad dollar began to rebound from recent lows. The subsequent drop in the pound shouldn’t be associated with any budgetary impact.

OBR’s projections:

  • Growth: 4.2% in 2022, -1.4% in 2023, 1.3% in 2024, 2.6% in 2025 and 2.7% in 2026.
  • CPI: Inflation is set to peak at a 40-year high of 11% this quarter before dropping sharply over the course of next year, primarily in H2, to 7.4%. Inflation is then dragged below zero in the middle of the decade by falling energy and food prices, before returning the 2% in 2027.
  • Unemployment: expected to rise by 505,000 from 3.5% to a peak of 4.9% in Q3 2024.
  • Deficit: 5.7% in 2021, 7.1% in 2022, 5.5% in 2023  and continues to fall to 2.4% in 2027-28.




Simon Harvey, Head of FX Analysis

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