Budgets

The UK has run a budget deficit every year since 2000. For the 2024/25 financial year, public sector net borrowing has reached £151.9 billion, significantly exceeding the Office for Budget Responsibility’s forecast of £137.3 billion. It is therefore not a question of whether taxes will rise in next month’s Budget, but by how much.

Tax increases rarely stimulate economic growth unless the proceeds are deployed productively, for example, into infrastructure, research, education, or debt reduction that lowers long-term borrowing costs. Given the government’s somewhat mixed record on capital investment, there is reason to doubt that additional revenue will be used in this way. So, why then have stocks and bonds rallied?

Part of the explanation may lie in investor positioning rather than genuine optimism. The 0.5% drop in long-dated gilt yields over the past two months could reflect investors unwinding short positions, wary of being caught out if the fiscal outlook proves less bleak than expected. US Treasury yields have also moved lower, which has little to do with domestic fiscal policy but improves sentiment.

As for the record-setting returns of stocks in the FTSE 100, most are large multinationals deriving more than 80% of their revenues from abroad. By contrast, the performance of the FTSE 250, whose constituents are smaller and generate a greater share of their revenues domestically, has been notably more subdued, only recently recovering to pre-pandemic levels. All eyes now turn to Rachel Reeves on November 26th.