An early release of the UK budget report revealed more balanced tax increases and moderated growth forecasts, calming markets, but long-term spending plans leave fiscal questions unresolved, Commerzbank's FX analyst Michael Pfister notes.

Future spending raises fiscal concerns

"Usually, the most exciting event on the day the budget is presented is the speech by the British Chancellor of the Exchequer, Rachel Reeves, and the presentation of the new report by the Office for Budget Responsibility (OBR) does not take place until after the speech. Yesterday, however, things turned out a little differently. Due to an error, the report was published before the speech, meaning that most of the exciting details were already known when Reeves finally spoke in Parliament."

"The headroom relative to the fiscal rules for the 2029/30 fiscal year increased to GBP 22 billion (from GBP 9.9 billion), and although taxes were significantly increased (with an expected additional revenue of GBP 26 billion), the changes appear to be more balanced this year and are not expected to further fuel inflation. Although the OBR revised its overly optimistic growth forecasts, the correction was not too big. The growth forecasts are still somewhat optimistic but much more realistic, which should limit the need for significant future corrections."

"The capital markets seemed to welcome the changes with relief: government bond yields fell significantly, and the pound closed slightly higher after a volatile day. However, spending is likely to increase significantly over the next two years, with more savings planned for 2029/30 when the fiscal rules take effect. However, the elections will already be approaching by then, making it doubtful that these tax increases, which are intended to balance the budget, will actually be implemented. Once again, we are left with a budget that does not address the fundamental problems, preferring to postpone them to a later date."