The aftermath of the 2024 Autumn Budget did not result in a chaotic “mini” Budget meltdown, but it also did not meet the high expectations set by the chancellor. Rachel Reeves, in her first fiscal event, aimed to demonstrate her commitment to supporting UK economic institutions and achieving fiscal balance. Investors were reassured by news that Reeves was on track to meet her fiscal rules ahead of schedule, as well as by projections from the Office for Budget Responsibility (OBR) indicating a decrease in net financial debt as a percentage of GDP by 2027-28. Initially, 10-year gilt yields dropped as Reeves presented the Budget.
Reeves also made a point to express her support for UK economic institutions, acknowledging the efforts of the Bank of England staff and emphasizing the importance of the OBR. This contrasted sharply with the approach taken by Liz Truss and Kwasi Kwarteng in 2022, who had questioned the independence of the Bank of England and disregarded OBR forecasts.
However, despite these positive aspects, there were challenges to address. The OBR’s economic and fiscal outlook revealed concerns about inflation, with projections indicating a rise to 2.6% in 2025 before returning to target levels. This would lead to an increase in interest rates over the next five years, causing 10-year gilt yields to climb post-Budget announcement. While this situation may evoke memories of Truss and Kwarteng’s stimulus package in 2022, the current economic context is different, with inflation below the 2% target and the Bank of England lowering rates.
Looking ahead, the OBR’s report also highlighted less favorable forecasts for economic growth and the chancellor’s fiscal headroom against her rules. While short-term growth is expected to improve due to Budget measures, GDP is projected to remain largely unchanged in five years. This poses a challenge for Reeves, who aims to maintain debt as a share of GDP within bounds. The OBR cautioned that slight interest rate overshoots could erode the limited fiscal buffer by 2029.
In addition to domestic factors, global events such as the US election and economic indicators also influenced market dynamics. Positive US GDP figures alleviated recession fears but raised interest rate expectations, impacting Treasury yields. The upcoming US election could introduce further volatility in bond markets, unrelated to the UK Budget.
Simon French, chief economist at Panmure Liberum, noted that the UK’s debt levels and tax burden are in line with G7 standards, suggesting that UK sovereign debt does not warrant unfavorable treatment. Even if yields experience fluctuations in the coming weeks, this situation is distinct from past Budget fallout.
In conclusion, while the 2024 Autumn Budget had its successes and challenges, the broader economic landscape and global events will continue to shape market dynamics in the days ahead. The chancellor’s commitment to fiscal responsibility and support for economic institutions will be tested as she navigates inflationary pressures and growth concerns in the coming years.