Fresh analysis from a leading economics consultancy has warned that the risk of a crisis in investor confidence towards UK assets following last week's Autumn Budget 'remains live', despite a largely calm initial market reaction.
Credibility of Fiscal Package Under Scrutiny
Oxford Economics stated that markets will 'gradually lose faith' in the government's fiscal plans. The firm's chief economist, Andrew Goodwin, argued that the government's strategy of frontloaded spending and tax rises scheduled for later years, combined with unpredictable public responses to a raft of new levies, will erode trust in its fiscal discipline.
'We think that confidence will dwindle as markets question the credibility of the package,' Goodwin wrote. He predicted this would lead to a 'slow burn' of rising risk premiums and a falling pound.
Why the Immediate Market Reaction Was Muted
In the days before the Budget, there were significant fears of a sharp market backlash. Investors were concerned that the Chancellor's move away from a pre-announced income tax hike to a complex array of smaller revenue-raising measures would create uncertainty. The total impact of such a 'smorgasbord' of taxes is notoriously difficult for markets and forecasters to gauge.
However, the immediate fallout in bond and currency markets was limited. This was attributed to several key factors:
- The Chancellor more than doubled her 'fiscal headroom' against her own rules.
- Most announced measures were deemed non-inflationary.
- The Debt Management Office opted to skew new gilt issuance towards shorter-term bonds, reducing supply pressure on longer-dated debt and helping to keep yields in check.
The Looming Threats to Stability
Oxford Economics cautioned that the current calm is 'unlikely to last'. Goodwin highlighted the potential for painful policy U-turns, reminiscent of those following the 2024 Autumn Budget, and a critical lack of measures designed to boost the UK's economic growth.
'The risk of a sudden confidence crisis remains live,' he warned. He pointed to the backloaded nature of tax measures, the uncertain impact of many new taxes, an absence of spending restraint, and no growth plan as fundamental flaws that undermine the package's credibility.
Goodwin also noted that a 'more sudden loss of confidence' could be triggered by unforeseen political events, such as renewed leadership speculation or the government yielding to spending demands from restive backbench MPs.
