UK Budget: Ensuring Fiscal Discipline

At today’s press conference, UK Chancellor Rachel Reeves unveiled the UK budget, accompanied by the Office for Budget Responsibility's publication of its Economic and Fiscal Outlook for the five-year period leading up to 2030-31. In the central forecast, the government's fiscal mandate aims to achieve a balanced current budget by 2029-30, with a larger fiscal margin of £22 billion compared to earlier figures reported in March. While assuring investors of fiscal credibility and a commitment to remaining on target, the government's policies may inadvertently introduce distortions in the private sector, particularly due to increased taxes and other fiscal measures . On this occasion, the Chancellor reiterated her mantra that there will be no return to austerity, highlighting the government's commitment to sustaining investments in the economy and healthcare. However, we think that risks are titled to the downside. Indeed, the Office for Budget Responsibility (OBR) lowered this afternoon its medium-term productivity growth forecast to 1%, down from 1.3% in March, citing persistent weaknesses in productivity performance and a failure to rebound from recent economic shocks. Additionally, the OBR indicated that approximately three-quarters of the planned reduction in borrowing over the next five years will be driven by tax increases. At the same time, budget policies are expected to lead to increased spending each year, resulting in an additional allocation of £11 billion by 2029-30. In our opinion, the strict f iscal stance is likely to weigh on growth outlook next year, which should pave the way to more monetary policy accommodati on in line with our expectations .