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Last Thursday, the UK’s fiscal drama took another turn as Chancellor of the Exchequer Jeremy Hunt delivered the widely watched Autumn Statement. After the recent fireworks, some observers we follow anticipated markets would experience some volatility in the announcement’s wake, but they got very, very little.[i] That predictably led to observers claiming he had successfully assuaged markets, but we think that is personality politics, not analysis. In our view, the answer is much simpler: We think Hunt’s plan can best be described as a package of rather meagre tax hikes and the usual not-so-austere slower pace of spending growth. It seems more likely to us the market’s big collective yawn was related to the sheer lack of anything surprising in this announcement, given the government’s widespread telegraphing of what would be in it.[ii] So we suggest setting that aside. We think the more telling thing about this plan—and the analysis around it—is just what it shows about sentiment toward the UK economy today.
First, here are the particulars of the new fiscal plan, which replaced the mini-budget, which amended the Budget, all in a matter of a few months.[iii]
So where his predecessor’s plan largely sought to avoid the effect of inflation (rising prices across the economy) artificially pushing some earners into higher tax brackets, Hunt’s doubles down—it freezes brackets longer and even reduces the top threshold. The scope of this isn’t gigantic, but we think it is notable that the two plans move in almost exactly opposite directions.
One thing Hunt did do that his predecessor Kwasi Kwarteng didn’t—to the chagrin of many observers—was seek analysis of his plans from the Office for Budget Responsibility (OBR). And this is where this proposal gets (somewhat) interesting, in our view. The OBR drew the attention of many commentators we follow by declaring the UK in a recession—a broad, lasting decline in economic output—that would likely run through early 2024.[iv] Now, mind you, the OBR isn’t the official arbiter of UK recessions (there isn’t one) and all this amounts to is a forecast. Perhaps a UK recession does loom—we see that as very possible. Perhaps it indeed began with Q3’s GDP decline, as the OBR anticipates.[v] Yet publications we monitor left and right latched onto the OBR’s forecast and started touting not only recession outlooks, but long recession.
Most commentators’ takes on the budget and all matters surrounding it are politicised—on party lines, pro-Brexit vs. anti-Brexit lines or even those invested in particular personalities within the Conservative Party. We think investors benefit from setting it all aside. As we showed you mere weeks ago, the UK doesn’t have a debt problem, fiscal hole tied to inflation aid notwithstanding. Hunt’s allegedly tough choices in small and mostly 2024 tax hikes and a slower pace of spending growth may be a minor economic headwind, but that is about it, in our view. Bear in mind, too, that the last time the UK tried this brand of austerity, our research revealed spending routinely rose more than the initial plans as the government kept kicking the can. Fiscal policy is always subject to change. It may be particularly so in the UK, where the next general election is due by January 2025, setting up some seemingly wonderful political timing if the government decides to cancel some of those 2024 tax hikes at the last minute.
The key thing we glean from the widespread attention heaped on a pretty boring budget announcement is this: We think all the noise around it, the recession forecast and the discussion of what is good and bad for markets really shows you how dour people are toward the UK economy. Whilst it may be hard to appreciate in the here and now, we think that dour sentiment suggests reality shouldn’t have too tough of a time delivering positive surprise.
[i] Source: FactSet, as of 22/11/2022. Statement based on MSCI UK IMI Index returns with gross dividends and 10-year UK Gilt yields, 17/11/2022 – 18/11/2022.
[iii] “Autumn Statement 2022,” The Government of the United Kingdom, 17/11/2022.
[iv] “OBR Sees UK GDP Falling 2% in Over a Year of Recession,” Staff, Reuters, 17/11/2022. Accessed through Yahoo! News.
[v] Source: FactSet, as of 22/11/2022.
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