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Investing.com -- The UK’s Autumn Budget could significantly impact markets, with Chancellor Rachel Reeves facing a fiscal hole of around £25 billion to fill, according to analysis from ING.
While the budget might ultimately push gilt yields down, several factors could cause borrowing costs to spike instead.
First, leaving little or no fiscal headroom could worry markets. The Treasury needs to find at least £15 billion, having had only £10 billion in headroom in March. Markets would likely prefer clear, upfront revenue measures over dubious future promises, regardless of the headline headroom figure.
Second, increased spending without credible restraint could alarm investors. After a 4% real-terms rise this year, departmental budget increases are set to slow to 1.9% in FY2026 and just 1% annually thereafter. Boosting next year’s spending by 3% instead of the planned 2% would cost around £5 billion and signal weak future discipline.
Third, back-loaded tax hikes or uncertain revenue sources could undermine market confidence. Front-loaded, predictable tax measures would be viewed more favorably than reliance on minor taxes with unpredictable yields. Reports suggest the budget may target asset returns and wealthier individuals through measures like extending National Insurance to landlords and pensioners in work.
Fourth, higher 2026 deficit and issuance plans could pressure gilt markets. While borrowing is expected to fall from 4.2% of GDP this year to 3.1% in 2026/27, any budget resulting in another year of approximately £300 billion in gilt issuance would concern bond markets.
Fifth, inflationary tax hikes could prompt the Bank of England to maintain higher interest rates. Markets currently expect rates to remain above 3.5% well into the future, and inflation-boosting measures like VAT increases could reinforce this outlook.
Finally, changing fiscal rules represents the biggest risk. While bringing forward next year’s planned rule change (allowing a 0.5% GDP deficit) might seem minor, it would likely increase near-term borrowing and could trigger a significant rise in gilt yields.
Ten-year gilt yields have fallen recently but remain highly sensitive to borrowing news as the October 30 budget approaches.