What to Expect on UK Budget Day

Controversy is already erupting with speculation about what the new UK Budget will include, with higher taxes expected, but how could it affect the markets?

Tax and Spend

On Wednesday, the Chancellor of the Exchequer, Rachel Reeves, will present the Budget to Parliament during market hours. The Budget is expected to include several provisions aimed at raising new taxes to address deficits in the nation's finances. Some measures have been signalled, but the market reaction will likely depend on the details.

In the lead-up to the announcement, the FTSE 100 has largely been positive while the pound has been weaker, though this may relate more to factors outside the UK as the travel sector led gains following a drop in oil prices over the weekend. Last week, the FTSE was down and business confidence was at a 4-month low, with corporate concern focused mainly on potential tax increases.

The Chancellor has already made some pre-budget announcements, including last week's technical change to debt calculation rules that will allow for spending an additional £50 billion from borrowing. The Budget will presumably include further taxes to cover this borrowing. It is estimated that the Chancellor will seek to raise as much as £40 billion in tax increases and spending cuts this year, with potential rises in capital gains tax, insurance tax, and fuel duty. Both the Chancellor and party leader Keir Starmer have repeatedly pointed to an estimated £22 billion deficit left by the previous government but say taxes will not increase for "working people".​

Impact on Markets

One potential positive for the Budget is that it will eliminate some uncertainty for markets, particularly concerning the disastrous 2022 "mini-budget", which could lift the FTSE 100 as it has underperformed global markets ahead of the fiscal announcement. As most UK stocks earn the majority of their income overseas, the Budget's impact may be muted. Pre-Budget discussions around what constitutes a "working person" and potential targets for higher taxes have concerned rental property owners and homebuilders. Another sector the Chancellor may target is gambling, which has already underperformed in press reports.

Beyond sectors avoiding penalties, little upside exists for any given sector as spending increases focus primarily on social services. A government source summarised the aim as "asking businesses to help" through extra NHS funding. Potential measures include higher employer national insurance, affordable housing and school spending, and ending bus fare subsidies.​

Footsie in Triangle

The FTSE 100 index has been moving within a relatively narrow range for several months now between 8420 and 8160, resembling a symmetrical triangle. If the index rises above the 8400 level, this could indicate the start of a new upward trend towards the measured-move projection of around 8660 points. Alternatively, a break below the lower trendline in the 8200-8160 range may pave the way for a decline towards the 8000 mark.​

Source: SpreadEx / UK 100

Key Takeaways

The UK Budget will be announced on Wednesday and is expected to include several new tax measures to address budget deficits. Speculation suggests taxes may rise on capital gains, insurance, and fuel. The Chancellor aims to raise £40 billion through tax increases and spending cuts this year. Key sectors of interest are property, homebuilding, and gambling, which have been flagged as potential targets. However, the impact on markets may be muted as most UK stocks earn income overseas. Yet, any positive news would eliminate uncertainty after the previous "mini-budget" disasters, suggesting a potential relief rally.