Episode summary
What to Expect From the UK Budget
Thoughts on the Market (Morgan Stanley)
· · 8 min · Hosts: Andrew Sheets, Bruno Cara
Summary
The UK’s upcoming budget is framed as the country’s key fiscal event, with the chancellor using updated forecasts to decide whether spending cuts, tax changes, or both are needed to keep the government on a self-imposed path toward current budget balance in year three of the forecast. The guest said the goal is not just balancing day-to-day spending but also reducing debt-to-GDP over five years, which would require a primary surplus of around 1.5% of GDP. Even so, the UK’s fiscal position has improved relative to several peers, with the guest putting the UK primary deficit at just under 1% of GDP in fiscal 26/27 versus larger deficits in France and the US.
The budget itself is expected to be relatively low-key, at around £10 billion of measures, though the market is watching for support to households facing higher energy inflation and for possible decentralization measures tied to regional growth. The guest said the UK remains unusually centralized for a G7 economy and could begin shifting more fiscal control to regions.
On the broader economy, the guest argued that the UK has surprised positively this year, helped by tech-sector growth of 8%, stronger consumer spending, and resilient household and corporate balance sheets. The guest is more constructive than many forecasters on productivity and potential growth, and expects two Bank of England rate hikes versus four priced by markets, which would imply higher gilt yields and debt-servicing costs.
Key takeaways
- The guest said the UK budget targets current balance in year three and a falling debt-to-GDP ratio over five years, implying a primary surplus of around 1.5% of GDP.
- Morgan Stanley sees the UK primary deficit at just under 1% of GDP in fiscal 26/27, better than the IMF’s estimates for France and the US.
- The guest expects a relatively low-key budget of about £10 billion, with attention on energy-inflation relief and possible devolution measures.
- The guest said UK growth has outperformed expectations, helped by tech-sector growth of 8% and firmer consumer spending.
- Morgan Stanley expects two Bank of England hikes, while markets are pricing four, a gap that could keep gilt yields elevated.
Notable quotes
“The budget is the UK's key fiscal event. It is the time of year when the chancellor receives a refresh of economic forecasts”
“we need to be running a primary surplus of around 1 and a half% of GDP”
“We're expecting a relatively low-key budget. So the scale of measures at around 10 billion pounds”
“growth has outperformed in the first half of the year. In line with our long-standing thesis that UK ought to be a beneficiary of the global AI boom”
“We're expecting two hikes, but the market is still pricing four hikes”
How the episode opens
Welcome to Thoughts on the Market. I'm Andrew Sheets, global head of fixed income research at Morgan Stanley. — And I'm Bruno Cara, Morgan Stanley's chief UK economist.
Today, the UK makes a budget, why it matters, and more generally, what we've gotten right and wrong about the country. It's Wednesday, October 14th at 2 p.m. in London.
Bruna, it's great to be here talking with you and I'd like to get into a bigger discussion on the UK and what we've gotten right and wrong about the direction of the country this year. But more immediately, it has a very big event coming up. What is the budget and why is there so much focus on it?
The budget is the UK's key fiscal event. It is the time of year when the chancellor receives a refresh of economic forecasts and decides whether he needs to respond to these uh whether there's any spending cuts or increases that are required and whether there's any tax hikes or potentially tax cuts that are required too all with the view of ensuring fiscal consolidation and executing on what is a self-imposed fiscal framework. Here in the UK the main target for the Treasury is to achieve current budget balance in year three of the forecast.
The fiscal watchdog forecasts five years of economic variables and the idea is by the third year we ought to be spending outside of investment expenditure as much as we're receiving in tax receipts. So all of that happens once a year in the budget.
Now I might just stop you there because in the context of these other budget pictures that we see around the world, the US is running a large budget deficit, France is running a large budget deficit, Japan's increasing its budget deficit.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- uk budget
- uk growth outlook
- uk inflation
- public finances
- fiscal consolidation
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “What to Expect From the UK Budget” on YouTube
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