How Healey's first UK budget could ripple through markets
EWU•John Healey delivers his first UK budget on October 28 as borrowing costs and energy prices rise. The government's fiscal headroom has fallen from £24 billion to an estimated £8.5 billion-$16 billion, while banks face possible tax increases.
1. Fiscal pressure builds
A global bond selloff pushed the 30-year gilt yield briefly above 6% in October, eroding the government's £24 billion fiscal buffer recorded in March. Economists estimate the headroom is now between roughly £8.5 billion and £16 billion as borrowing costs raise the debt interest bill. Bond investors are seeking reassurance on fiscal discipline, while sentiment has improved on relative political stability, better economic data and the Bank of England's pause in gilt sales.
2. Sterling and bank concerns
Sterling, near 16-month highs against the euro, has shown little apparent concern about the budget, and options trading does not indicate it is a key risk event. Analysts are watching whether the government uses public financial institutions to borrow funds. Healey is reportedly poised to tax banks for additional revenue; analysts see a possible increase to the 3% surcharge on bank profits, which currently raises just over £1 billion a year. Shares of HSBC, NatWest, Lloyds and Barclays are down 3% to 5% in October so far.
3. Other sectors in focus
Housebuilder shares surged in late September after plans for a first-time buyer support scheme were confirmed, but rising mortgage rates have since erased their pre-budget gains. Britain's utilities sector is up almost 4% since Prime Minister Andy Burnham's policy announcements, including plans for a publicly owned networks company, while the broader market is little changed.
