Economic outlook

How does the mini budget U-turn alter the course for markets & the UK economy?

With most of the measures contained in September’s so-called mini budget reversed, how will markets and the economic outlook be affected?

What was announced?

On Monday 17 October, the new UK Chancellor, Jeremy Hunt, announced a swift reversal of three-quarters of the measures contained within September’s mini budget. All of the tax cuts contained within the mini budget revealed 23 September, aside from National Insurance and Stamp Duty, have been abandoned.

Perhaps more radically, the energy price guarantee beyond April 2023 will be reviewed with a view to replacing the universal price freeze with more targeted support.

Finally, the Chancellor indicated that further cuts to public spending and / or tax increases might be required.

What does all this mean for the UK’s finances?

Precise details on the savings from the policy changes are scarce.

In televised remarks, the Chancellor said reversing the tax measures, including the previously announced freeze on corporation tax and keeping the top rate of income tax, would raise around £32 billion per year. And we would expect changes to the energy support scheme to run in the low tens of billions of pounds.

A clearer picture should emerge when the mini budget is tabled alongside revised economic projections from the Office for Budget Responsibility on 31 October.

What can markets expect from here?

Although the Chancellor’s announcements this week (and the Bank of England’s interventions this past fortnight) don’t materially alter the gilt supply outlook, they are likely to calm markets and reduce some of the extreme volatility seen in recent weeks.

Pressures on Sterling longer term could ease

Sterling regained some ground against the US dollar and the euro in the initial aftermath of the announcement, with investors buoyed by the prospect of greater UK fiscal sustainability. We’re a bit more cautious in the near term. Despite a seismic shift in government economic policy, much of the of the downward pressure on the pound today remains; the largest part of the stimulus is the price cap, not tax cuts, after all.

That said, not everything leans towards Sterling weakness. Yes, pressure from high energy prices is acute. But prices have come down of late, and if that persists borrowing will be noticeably lower than assumed from this very costly policy. Throw in a few delayed tax cuts and windfall tax increases, lower market yields and less aggressive Bank of England monetary tightening and suddenly, the future doesn't look as challenging for the pound. So in our view, the outlook for Sterling looks more balanced than it did a few weeks ago.

Government borrowing levels and costs will rise

The fiscal measures announced this week coupled with a deteriorating economic outlook make the outlook for government borrowing beyond this year more uncertain. We see public sector funding requirements more or less unaltered this year (at around £182 billion) – as most of the policy reversals take place from next year.

But the cost of the energy support package – both in terms of design beyond April 2023, and changes in wholesale energy prices – could sway borrowing levels dramatically. The mid-point of our reasonable range of estimates implies the central government’s net cash requirement might total £175 billion next year, implying gross government financing needs of roughly £300 billion, which is substantial.

So, despite the U-turn, question marks remain over the scale of funding required next year. Ultimately, government borrowing still looks set to increase significantly compared with pre-covid levels (which is what triggered this initial bout of market turmoil). And in a high inflation, low growth world, this additional gilt supply is going to struggle to find a home with investors. This will mean higher borrowing costs for government – and corporate borrowers.

Get in touch

Login to Market Insights to read the full analysis. Don’t have access? Speak with your NatWest representative or contact us at NatWest Business.

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of NatWest Group, as of this date and are subject to change without notice. Copyright © NatWest Group. All rights reserved.

scroll to top