The UK’s Autumn budget has to balance three pressing things. It has to balance the need for the UK to be seen as fiscally responsible without stifling growth and, simultaneously, keeping the chances (albeit slim) of the conservative party winning the next general election. It is these conflicting needs which will drive the way the budget is delivered.

Pressing need number 1: The need to be fiscally responsible

The Bank of England, in its last rate meeting, projected that the UK would be in recession throughout 2023 and 2024 H1.

The UK’s Chancellor is expected to fill the budget shortfall of £50 billion with 40% coming from tax rises and 60% coming from spending cuts. This broad expectation has been supporting the UK’s bond market as it has confidence that Hunt’s approach is anti-inflationary. The approach towards energy will be key in assessing the longer-term inflation risk too.

Pressing need number 2: Without stifling growth

The UK is the only G-7 economy that has output below pre-Covid levels.

Brexit risk, lack of political direction, and the Russian/Ukraine crisis have all weighed on the UK’s economy. The key need is that: with all the tax rises and spending cuts expected, the UK does not have stunted growth by measures that are too harsh, too quick. Just as Liz Truss tried to stimulate the UK’s economy too quickly, there is an equal and opposite risk that the Chancellor depresses the economy too quickly. As always there are risks to the left-hand side of the road and to the right.

Pressing need number 3: With chances for the Conservative Government winning the next election

The Chancellor may try and offset this risk by delaying the implementation of these changes after 2024 and the next Parliament. However, the risk is that if the market sees this as too late then once again the UK will find itself dealing with disorderly moves in the GBP. Politically this will deal a blow to the government too.

The trade

The best trade will be from a big surprise. Watch for the GBP selling if the market sees a delayed implementation as ineffective. Also, watch for GBP buying if the market responds to the plan with confidence and hopes it will reduce the 5 or 6-quarter recession the BoE is currently projecting.