20181025-法国巴黎银行-UK_Budget_preview__Upbeat_tone,_but_challenges_remain_8页_892kb

UK Budget Preview Summary

Core Content

The UK Autumn Budget, scheduled for 29 October, is expected to be delivered in an upbeat tone, reflecting improved public finances and a relatively solid economic growth backdrop. However, the Chancellor faces significant challenges in convincing Parliament that austerity is over and that a "Brexit growth dividend" is achievable, given the ongoing uncertainty surrounding Brexit negotiations and the fiscal targets that remain in place.

Key Messages

• Upbeat Tone Expected: The Chancellor is likely to present improved public finance figures, with borrowing down by 35% compared to last year, due to stronger growth in receipts and weaker growth in government spending.
• Fiscal Improvements: If the year-to-date trend continues, borrowing could be £11bn lower than anticipated, providing the Chancellor with more flexibility in policy decisions.
• OBR Forecasts: The Office for Budget Responsibility (OBR) is expected to revise its borrowing forecast downward by £13bn for 2018/19, leading to a deficit of around £25bn or slightly above 1% of GDP.
• Cyclically-Adjusted Deficit: The cyclically-adjusted deficit is projected to be around 1.2%, offering a buffer of over 1% of GDP against the fiscal target of below 2% by 2020-21.
• Brexit Uncertainty: A Brexit deal is unlikely to provide concrete details on the future trading relationship, so the OBR will not revise its assumptions significantly.
• Political Challenges: The Budget may be overshadowed by political developments, particularly regarding the Brexit deal and potential opposition from the DUP.
• Fiscal Targets: The Chancellor's objective is to return the public finances to balance as early as possible in the next parliament, despite the improved financial position.

Fiscal Mandate

• Reduce Cyclically-Adjusted Borrowing: To below 2% of GDP by 2020-21.
• Public Sector Net Debt: To fall in 2020-21.
• Welfare Expenditure Cap: To be contained within a pre-determined cap and margin set in 2016.

Market View

• Net Financing Requirement: Expected to fall by £5bn in FY2018/19, with a forecast of £101 billion.
• Gilt Funding: The reduction in borrowing needs will likely be implemented via removing one long and one linker auction, and reducing unallocated issuance by £1.4bn.
• Remit Split Forecast:
  • Shorts: 25.8%
  • Mediums: 21.4%
  • Longs: 29.1%
  • Linkers: 21.5%
  • Unallocated: 2.2%
• Positive Impact on Gilt and ASW: The changes in financing needs, along with future financial improvements, are expected to be positive for long-end gilts and ASWs, though Brexit uncertainty may limit the impact.
• RPI Consultation Risk: There is an outside risk that a consultation on RPI issuance and its future may be launched, which could negatively affect the inflation market if it proposes ending RPI-linked bonds or reforming the index.
• RPI Preference: Despite the risk, RPI-linked bonds remain preferred by many DB schemes, especially those still using RPI for liabilities post-1997.
• CPI/CPIH Growth: The CPI/CPIH-linked market is growing and may become more prominent as DB schemes run off and liquidity increases.

Potential Policy Changes

• NHS Spending Increase: An additional £20bn for the NHS by 2023-24 is already planned.
• Fuel Duty Freeze: A further freeze in fuel duty is also likely.
• Universal Credit Rollout: A potential softening in the rollout of universal credit may be announced.
• Tax Measures: Possible announcements include a "digital sales tax" and changes to stamp duty for foreign buyers. Pension tax relief changes, such as reducing the lifetime allowance or annual allowance, could also be considered, though likely delayed until next year.

Challenges and Constraints

• Austerity Conditional: The Chancellor may make the end of austerity conditional on better-than-expected growth rather than making detailed policy pledges.
• Fiscal Buffer: While the improved financial position offers a buffer, the Chancellor is likely to be cautious and not use all of the £13bn gain due to the risk of future OBR revisions.
• Uncertainty Impact: Prolonged uncertainty could lead to a slowdown in growth, affecting the fiscal outlook and necessitating a continued fiscal buffer.

Summary

The Autumn Budget is expected to be delivered in an upbeat tone, with improved public finances allowing for some easing of austerity measures. However, the Chancellor will need to navigate political challenges and ongoing Brexit uncertainty, which may limit the impact of the budget on the market. The OBR's revised forecasts provide some flexibility, but the long-term fiscal objective of balancing the public finances remains in place. The market is likely to see a modest reduction in borrowing needs, with a focus on long-end gilts and ASWs, though Brexit uncertainty could temper any positive effects. A potential RPI consultation poses a risk, particularly if it leads to the phasing out of RPI-linked bonds. The Chancellor is likely to be cautious in implementing major policy changes, given the need to maintain fiscal stability and the political environment.