Britain Gets a Mild Budget. And Welcome Clarity.

At last, after months of rumors, UK Chancellor of the Exchequer John Healey has opened his red briefcase and released this year’s Budget. Better still, it was … boring! No huge changes, no major surprises. Just details and clarity on things already previewed. For markets, we think this is as fine an outcome as can be under the circumstances.

The circumstances in question are the UK’s fiscal rules, which require the projected budget deficit to be eliminated by the end of the current Parliament or within three years, whichever is further out. The arbiter is the nonpartisan Office for Budget Responsibility, which scores fiscal policy changes’ effects on revenue and spending according to its own models and assumptions. This helps stave off big tax hikes that wouldn’t generate much revenue, like wealth taxes and capital gains increases (more here shortly). But it also prevents big tax cuts. It isn’t fashionable today to think broad tax cuts will stimulate growth and raise revenues.

As a result, the Budget is an annual exercise in tweaking fiscal policy to get projected deficits in line. Much as households and businesses (and the broad economy) might benefit from big-bang tax cuts, fiscal rules prevent them. Politicians know this and occasionally mull changing them, but they tend to think twice when bond market volatility strikes. Those tantrums always look more about sentiment than actual debt troubles, but politicians are a sensitive bunch. No one wants to be the next Liz Truss, evicted from 10 Downing Street by volatility after mere days. Thus, Budgets are about adding a little austerity when forecasts require it and easing austerity a smidge when forecasts permit.

In this environment, it is impossible for any chancellor, regardless of party, to deliver a Budget everyone likes. All will create winners and losers. Since everyone knows this, the pre-Budget season is a frenzy of rumors and speculation. The uncertainty makes everyone fear they could lose. The gloom can weigh on stocks and discourage investment until people get clarity. Meanwhile, the constant leaks and rumors help markets pre-price the changes.

Once the Budget arrives, markets don’t much care about whether people broadly see it as “good” or “bad.” Rather, two items tend to influence returns. One, do people finally have clarity? Two, does the Budget create surprise losers … or does it prove milder than all the rumors made people fear?

This Budget looks to grant both clarity and a mild flavor. Clarity started trickling in this month, when the government ruled out capital gains tax hikes. Wealth tax chatter simmered down when Treasury insiders leaked that bank tax hikes would be the main revenue raiser. Now we have clarity in full, and the details are milder than everyone feared. Markets weren’t bothered. UK stocks were basically flat on the day, while bond yields were mixed. Both are about as “meh” a reaction as you can get. A boring Budget bored markets that had long since priced rumors.

Take the bank tax. In August, several outlets reported Healey was considering a windfall profits tax (citing high rates as a windfall) or raising the bank corporate tax surcharge. Last month, Treasury leaks zeroed in on the surcharge, telling The Guardian a reversal of 2023’s cut was on the table. That would have taken the rate from 3% to 8%. But today, Healey announced it will rise to just 6% and be “time-limited” to 15 months from January 2027. We think this is a negative for banks, but it is smaller than expected. For stocks, that seems like a positive surprise. 

Relief applies across the board. Taxes on rental property and savings interest income will rise another two percentage points (ppts) (on top of the two ppt hike former Chancellor Rachel Reeves already slotted) next April, but dividend taxes aren’t changing. Painful, but not as much as feared. The capital gains tax exemption for selling a business will drop from £1 million to £500,000, but it gets replaced by a blanket 10% rate on lifetime gains up to £10 million for company founders. That is a net win for entrepreneurs. State pension payments will remain income tax-free for those living off them alone even as inflation lifts them past the £13,000 tax allowance. Another fear defanged.

On the savings front, not much is changing. The total annual individual savings account (Isa) contribution limit stays at £20,000. But there are some tweaks. Last year, Reeves cut the cash Isa limit to £12,000 to nudge more funds into stocks-and-shares Isas and get more Brits to reap stock returns. But loopholes letting people hold cash tax-free in a stocks-and-shares Isa gutted the change, and Healey unwound it today. Elsewhere, the “lifetime” Isa, primarily intended for first-time homebuyers, will be replaced with an actual first-time buyer Isa. Contribution limits stay at £4,000 annually, and the government still offers a 25% match (with a lifetime maximum of £20,000). But the match will now be paid at withdrawal, not contribution. This prevents people from investing the government’s contribution, which is a bummer. But early withdrawal penalties are going away.

Business tax tweaks look mostly beneficial. Small businesses get more relief from business rates, which tax commercial property. Expensing allowance changes will let businesses deduct the full cost of new plants and machinery in year one, theoretically incentivizing investment. Some red tape is going away, as are tariffs on over 100 food items. That gives supermarkets more wiggle room as the minimum wage rises 3.9%. And online marketplace platforms will now have to collect value-added tax (VAT) on behalf of sellers who use them, which adds compliance costs but helps curb avoidance and levels the playing field for brick-and-mortar shops. Again, winners and losers.

Elsewhere, there was very, very modest tax and energy bill relief for some households, which forecasts say rising living costs will eat up. Prime Minister Andy Burnham’s plans to spur regional and municipal investment so far amount to letting mayoral authorities keep local business rates revenue and access federal investment loans. No word on how this helps towns that don’t have mayoralties. And welfare and social care, Burnham’s two other biggest homework items, got punted pending further study.

Tweaks, clarity, no major surprises. And best of all, no one is really cheering it. We surveyed coverage across the political spectrum. Left-leaning and right-leaning publications alike mostly panned it. All deem Britain’s tax burden too high, debt too big and growth too slow for modest tweaks to do anything.

That gloom is fine for stocks. It keeps expectations low, extending the UK’s wall of worry. The UK doesn’t need rip-roaring growth to boost stocks. Continued modest growth would be a positive surprise, judging from headlines and forecasts. Budget clarity should be one more tailwind enabling this.