United Kingdom: Budget faces limited fiscal flexibility - Nomura

Nomura’s UK budget preview expects Chancellor Healey, at his first budget on 28 October, to allow fiscal headroom to fall to around £15bn. Following September public finance data, the cash deficit is no longer surprising to the upside. Nomura projects a £4bn overshoot in the 2026-27 financing requirement, funded equally by additional gilt and T-bill issuance.

Headwinds constrain fiscal flexibility

"At his first budget (12.30pm Wednesday 28 October) Chancellor Healey is likely to allow a fall in fiscal headroom to around £15bn. Following today’s September public finance data the cash deficit is no longer surprising to the upside. Still, we think a combination of a lower run-rate of NS&I inflows and the need for cost-of-living support over the winter will mean a £4bn overshoot of the financing requirement for 2026-27."

"We assume this will be met equally between more gilt (£2bn) and T-bill (£2bn) issuance relative to existing plans (which were for £246.2bn and £5bn, respectively)."

"The Chancellor has limited his wiggle room to fill the fiscal gap, having ruled out various tax rises (no income tax, VAT or national insurance tax rate rises as outlined in the 2024 Labour manifesto, with capital gains tax now added to that list). Behavioural effects may result from raising tax rates more on a lower tax base (vs. raising tax rates less on a wider base) to bring in the same revenue."

"Elsewhere, the focal point could be any decision by the Treasury to use the potential firepower of the public financial institutions to boost investment, though that will require private sector take-up, as well as government willingness to expand its programmes."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)