According to Zhitong Finance APP, the government led by UK Prime Minister Andy Burnham will unveil its first budget at 12:30 local time on Wednesday (20:30 Beijing time), a crucial test for global investor confidence in UK assets.
This marks the new government's first comprehensive articulation of fiscal policy since Burnham became prime minister in July. Markets widely expect the budget to focus on fiscal discipline without major surprises, an expectation that has boosted UK gilts, equities, and the pound in recent weeks.
Some investors argue that UK government bonds now carry safe-haven qualities, in contrast to turbulence in the eurozone bond market. To sustain this rally, UK Chancellor of the Exchequer John Healey needs to avoid major long-term fiscal commitments such as large-scale tax cuts or spending expansions.
Bond investors will pay especially close attention to the deficit forecasts published simultaneously by the Office for Budget Responsibility and the Debt Management Office's gilt issuance plans. Sebastian Mackay, investment director at True Potential, said: "What bond investors really want is a credible medium-term plan to ensure debt levels can peak and avoid an unsustainable path. All bond investors want to see that the supply of public debt won't explode."
UK gilts edged lower on Wednesday, in line with other sovereign bond markets. Although UK borrowing costs have risen amid a global bond selloff triggered by the Iran war, the increase has been smaller than in many other developed nations. Bloomberg indices show UK gilts returned 1.9% in dollar terms this month, compared with a 2.4% decline for French bonds and an average 0.4% drop for European developed-market bonds. UK equities have also outperformed peers, with the FTSE 100 and FTSE 250 both beating the Euro Stoxx 50 this year. Sterling has strengthened against most G10 currencies.
A budget that does not sharply roil markets would contrast starkly with previous years when investors sold UK assets over policy missteps. Some argue UK bonds still carry a sizable "credibility premium" to compensate for those past episodes. ING strategists expect 10-year gilt yields to fall after the budget as investors rule out spending surprises.
Limited Support, Restrained Scale
So far, measures proposed by the UK government have leaned toward temporary, targeted support rather than large-scale spending subsidies. These include expanding the 拢150 ($199) "warm home discount," freezing fuel duty, and scrapping some import tariffs. A proposal to raise the bank levy has also surfaced, which the market views as relatively positive for gilts. Filippo Alloatti, head of financials at Federated Hermes, said: "They won't take bold steps, but at the same time, I think they recognize the funding shortfall." He said that if the budget doesn't disappoint, the UK's image problem in global bond markets could improve.
Investors will also closely watch the government's so-called fiscal headroom. Healey inherited nearly 拢24 billion in budget headroom from predecessor Rachel Reeves, but that space has been eroded by accelerating inflation and higher borrowing costs from the Iran war. Primary gilt dealers now estimate the headroom at about 拢15.2 billion. Lauren van Biljon, senior portfolio manager at Allspring, said she expects "no unpleasant surprises on fiscal space" but cautioned that key parameters could still shift.
On borrowing, the market expects gilt issuance this fiscal year to be about 拢3 billion more than the latest plan in April. The Debt Management Office is expected to increase the share of short-dated gilts and make greater use of Treasury bills. Investors will watch closely whether the government uses so-called Public Financial Institutions (PuFIns), which allow the government to borrow in the gilt market for investment without damaging fiscal metrics.
Budget Seeks Stability, Growth Takes a Back Seat
A broader concern is that a cautious, fiscally tight budget does little to promote economic growth, potentially weakening business momentum and putting the pound at risk. However, the absence of leaks before the budget has helped restore some credibility. In previous years, policies were often publicly floated and then abandoned, causing sharp market swings. Peter Goves, head of developed-market sovereign debt research at MFS Investment Management, said: "Actions speak louder than words. Gilt investors still want to see the actual deficit numbers."
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