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Livesquawk - UK Budget Preview – Chancellor set to continue support but sound a hawkish tone
UK Budget Preview – Chancellor set to continue support but sound a hawkish tone

- Government expected to announce further GBP 20bln in support

- Limited tax hikes, other measures expected

- Economic forecasts likely to be little changed

- OBR seen revising 2020 deficit and 2021 GDP growth lower

- Statement scheduled to start at 12.30 GMT


By Harry Daniels

LiveSquawk News



02 March 2021 | 12:00 GMT


London – Wednesday’s Spring Budget from UK Finance Minister Rishi Sunak is expected to extend and replace a number of Covid-19 related support measures due to expire in the coming months. All this whilst signalling the need to prepare for targeted tax hikes in the months and years ahead.


The country’s Chancellor of the Exchequer has been in his post for just over a year now and has been praised for skilfully marshalling finances during one of the most challenging periods in the nation’s history. The coronavirus pandemic has inflicted the worst economic conditions on the country in more than 300 years. Unprecedented amounts of money have been spent to protect the lives and livelihoods of the population.


“The result has been a mind-boggling deficit projection of 19% of GDP for the fiscal year just ending,” said SocGen’s Brian Hilliard. “Obviously, at some stage, Sunak will need to take major steps to rein in the deficit and, ultimately, reduce the level of debt.


“However, he has to perform a delicate balancing act between, on the one hand, continuing support until it is clear that the economy can stand on its own two feet and, on the other, starting to reduce expenditure and raise taxes to repair the public finances.”


Support to be extended for a short while longer

The accelerated vaccination rollout has provided the country a glimpse of life after Covid, but the Chancellor is expected to extend a number of support programs to limit the level of economic scarring.


Deutsche Bank economist Sanjay Raja pointed out that a successful Spring Budget will need three pillars. “First, extending employment support in line with restrictions. Second, extending household and business support not only through the last leg of the pandemic, but through the initial stages of the recovery. And third, propelling and sustaining the recovery via higher investment.”


On the issue of the labour market, Citi Research’s Benjamin Nabarro worries for job prospects. “The OBR had forecast unemployment to peak at around 7.5%. Given the stronger recovery in the second half of 2021, and the extension of the furlough scheme, this peak may now be revised down to 7.0%. We remain a little more pessimistic.”


Growth to stall but rebound in time

Medium to long term economic projections vary among analysts, but there is a general consensus that GDP growth for the first quarter of 2021 will contract as a result of the third full lockdown in December.


SocGen’s Hilliard said, “The central scenario expected GDP growth of -11.3% in 2020, followed by a recovery of 5.5% in 2021 (then 6.6%, 2.3%, 1.7% and 1.8%). The out-turn for 2020 was -9.9%, which sets a firmer base for this year, but the extension of the lockdown will offset that better news with a fall in GDP in 2021.”


Investecs’ Philip Shaw said, “Altogether, then, despite a likely poor Q1, the economy looks most closely on track in levels terms to the OBR’s previous upside case playing out. That had activity returning to pre-virus levels by the end of 2021 rather than its central case forecast of late-2022. In terms of growth rates, revisions to the OBR’s forecasts could go either way though, depending on the magnitude of the Q1 fall and the Q2 rebound pencilled in. For the public finances, however, levels of GDP arguably matter more than growth rates.”


Bank Research estimates for borrowing and debt issuance

As much as the spending and taxation headlines matter, fixed income traders focus predominantly on borrowing commitments and debt issuance remits within the treasury announcement.


A Reuters survey of primary dealers produced a median forecast of GBP247.2bln gilt issuance in 2021/22.


Deutsche Bank Research said it expects borrowing in 2021/22 to drop to just around GBP170bln (from GBP375bln in 2020/21) with the Debt Management Office's gross gilt financing need at GBP260bln for the fiscal year.


UBS analysts predicted the DMO remit to include GBP260bln of Gilt supply and anticipate a bigger skew towards longs (30.5% from 28%) and linkers (16% from 7%) than in fiscal 2020. In cash terms, the Swiss bank forecasts GBP76bln of shorts, GBP 62bln of mediums, GBP 79bln of longs, and GBP41bln of linkers. “The high level of uncertainty over economic forecasts, the need for ongoing support and the timing of economic reopening leads us to attach a lower level of conviction to these forecasts than in previous years.”


Citi strategists forecast GBP269bln for gilt issuance in fiscal year 2021-22, an upward revision of just under GBP20bln versus the previous forecast. “In terms of the maturity split, we expect a much larger allocation to linkers, mainly at the expense of shorts. Overall, the supply versus QE picture is likely to remain in relative balance with QE absorbing 68% of net issuance to end-2021.”


Morgan Stanley Research said it expects approximately GBP230bln of gross gilt issuance in the next fiscal year, compared to the unprecedented supply volume of GBP485.5bln in 2020-21. “The recent fiscal outperformance relative to November OBR forecasts means that the DMO could be left with a significant positive cash balance after the 2020-21 funding round is completed. This should limit the impact of additional stimulus measures on gilt supply in the upcoming remit.”