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Autumn Budget: "one misstep could send markets tumbling"

ended 01. October 2024

With the Autumn Budget looming, and ominous rhetoric emerging from the Government, Newspage asked economists, tax experts, wealth managers and traders what Rachel Reeves must do to keep markets happy and avoid a repeat of the infamous mini-Budget of 2022.

One economist said: “While the risk of a 2022-style market meltdown appears low, investors remain wary. The reception will hinge on Reeves' ability to craft a budget that addresses the UK's mounting fiscal challenges without stifling the fragile economic recovery. The spectre of Kwarteng's ill-fated mini-Budget serves as a reminder of the market's allergic reaction to unfunded tax cuts. Moreover, with public debt hovering at post-war highs, the issue of debt sustainability sits atop the City's watchlist. As the Chancellor walks a tightrope between austerity and ambition, one misstep could send markets tumbling.”

Another said: “The key concern for the markets would be any measures that significantly increase the tax burden on individuals and corporations without accompanying stimulus to drive UK growth and any policies that risk being inflationary. Anything that pushes inflation higher will be unfavourable. Markets tend to react negatively to policies that are not pro-growth.”

The views of seven experts are below.

7 responses from the Newspage community

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Gabriel McKeown
Head of Macroeconomics at Sad Rabbit - Substack Newsletter
The Treasury's ominous whispers of "painful" measures have set the markets on edge, with investors warily eyeing any potential missteps that could spark a reprise of 2022’s mayhem. However, the economic terrain has shifted considerably since those turbulent days, with the UK demonstrating a Churchillian resilience, fostering a more stable environment less susceptible to extreme market reactions. While the risk of a 2022-style market meltdown appears low, investors remain wary. The reception will hinge on Reeves' ability to craft a budget that addresses the UK's mounting fiscal challenges without stifling the fragile economic recovery. The spectre of Kwarteng's ill-fated mini-Budget serves as a reminder of the market's allergic reaction to unfunded tax cuts. Moreover, with public debt hovering at post-war highs, the issue of debt sustainability sits atop the City's watchlist. As the Chancellor walks a tightrope between austerity and ambition, one misstep could send markets tumbling.
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Anita Wright
Independent Financial Adviser at Ribble Wealth Management
It is highly unlikely that Reeves would consider implementing anything similar to the infamous Truss budget. Lessons have surely been learned from that. The key concern for the markets would be any measures that significantly increase the tax burden on individuals and corporations without accompanying stimulus to drive UK growth and any policies that risk being inflationary. Anything that pushes inflation higher will be unfavourable. Markets tend to react negatively to policies that are not pro-growth. If Reeves starts altering business reliefs or business asset disposal reliefs, it would be a major downside for businesses and entrepreneurs, and the logic behind such moves would be questionable. Regardless of the additional £22 billion shortfall, the UK is consistently running a deficit of £100–£200 billion annually. Productivity is at an all-time low, and without radical changes, it's hard to foresee anything other than sluggish growth for the UK economy in the coming years.
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John Castle
Tax & Financial Planning Consultant at Tax Planning Solutions
Getting this Budget right first time will be fundamental to reassuring the markets that the nation's finances are in safe hands. If the Government get it wrong, the markets could wreak havoc. While balancing the books, it’s crucial that Reeves avoids controversial mistakes if she’s to be seen as credible, although the Winter Fuel Allowance and VAT on school fees may already have undermined that credibility. Decisions that are intended to raise more money for the public coffers, but in practice could well have the opposite effect, should be avoided. The targeting of non-doms is just one example. Also, the unintended consequences of reducing tax breaks on pensions would be lower levels of engagement, leading to an increased future burden on the state. It would also have a negative impact upon the level of investment into UK Plc, with wider implications for the economy as a whole. A big Budget ahead. Of course, taxing politically motivated gifts would be one way to balance the books.
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Riz Malik
Independent Financial Adviser at R3 Wealth
The 2022 budget was a textbook example of what not to do. The chancellor needs to make sure she doesn’t make the same mistakes as Kwasi or her business cards could be redundant before the ink has dried. As we learnt, the response from the financial markets to the budget can have major consequences for households up and down the country. However, we have already been primed for pain not pleasure so, as frightening as the Halloween Budget may be, it shouldn’t result in armageddon.
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John Choong
Head of Equities and Markets at Interpretiv
Bond vigilantes may find themselves at ease this time around, as despite the expected economic gloom, the nation's finances are likely to remain intact, thanks in part to Rachel Reeves's laser focus on deficit reduction. The Chancellor's fiscal prudence could ironically prove a boon for bond holders, as the current high-yield environment, coupled with looming recession fears, may trigger a rush into bonds. Investors seeking shelter from equity volatility could drive bond prices up and yields down, as they opt for the relative safety of fixed income in a turbulent economic landscape. However, if you want to gauge what markets really think about the Budget, look no further than the FTSE 250. Given that the index derives the majority of its income domestically, it will serve as a bellwether for local economic sentiment. Therefore, any significant downgrades in the UK's growth projections could see FTSE 250 multiples contract as investors price in lower earnings expectations.
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David Belle
Founder and Trader at Fink Money
The mini budget’s LDI fallout was largely an event that could have been (and was) foreseen. This time round, we do not have the fastest rate hike cycle in decades, the Prudential Regulation Authority and FCA actually have adequate oversight and there is more bedding in of the shift away from LIBOR to SONIA for interest rate hedging, which should have been postponed in January 2022 because of the monetary policy shift. The context is different now — there is very little that could occur from a fiscal perspective to cause September 2022 again.
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Mark Scott
Director and IFA at Positive Advisers Ltd
I've been getting many calls from clients wanting their 25% tax-free cash from their pension. They are terrified that Rachel will start taxing this feature of the current pension system. If she does make changes, they will most likely start at the beginning of the next tax year. IFAs would be inundated with calls for help if this change is enacted, and the markets could see massive withdrawals, sparking a fall in values in the sell-off.