UK budget preview: What to expect this time around?

The 1-week implied volatility for the pound is at its highest since March last year, indicating that traders are a little nervous ahead of the budget announcement later. Labour will be setting their first budget in 14 years, hoping to meet their election promises and avoiding the chaos that ensued from the Truss-Kwarteng mini-budget back in 2022.

For one, tax hikes are very much anticipated with what many are dubbing to be likely the biggest tax hikes in the UK in three decades. But it is the borrowing part that will be closely watched, with chancellor Rachel Reeves expected to announce some £40 billion worth of fiscal measures. For some context, that’s roughly 1.25% of the UK’s economic output.

Total government borrowing this year might end up being closer to £100 billion and that will beat the estimate set by the OBR of £87 billion. So, is there going to be worries about Reeves blowing apart the UK’s public finances?

The difference this time compared to the Truss-Kwarteng mini-budget fiasco back in 2022 is arguably that we’re in a different cycle in the economy and monetary policy.

Interest rates are coming down, so that offers some added room for comfort to Labour despite the increased borrowing. It’s now a question of how Reeves can sooth the public and markets – the gilts market in particular – and convince that this is a net positive for the UK economy.

The other thing to watch out for is Reeves looking to change up the UK’s self-imposed fiscal rules as she mentioned last week here. That will free up more room to borrow/spend but for now, those surveyed in the gilts market are believing she won’t shake things up too much and only dig into that “reserve” by a fraction to start with.

So, that’s one spot to watch in case for any drama in the budget announcement today.

This article was written by Justin Low at www.forexlive.com.