UK bets on a boring budget

0:00Yet again, we're rolling towards Budget Day when Brits do what we do best, looking slightly silly with some quaint traditions while also laying out the government's tax spending and borrowing plans. On the 28th of October, the new-ish Chancellor, John Healy, will wave his red briefcase around and head to Parliament to tell MPs the score. As for every Chancellor, for non-Brits, that's what we call our finance minister, he has a tricky task. Ideally, what we all want is more spending on stuff we all care about, for less money, free ponies for everybody and year-round sunshine. So today on the show, what acrobatics will Healy seek to perform to try and please all the people all the time?

0:45This is Unhedged, the markets and finance podcast from the Financial Times. I'm Katie Martin, a markets columnist at FT Towers, where everyone is limbering up for Budget Day. It's a Brit takeover today, boys and girls, because joining me in the studio, we have straight up econ nerd Chris Giles. Chris, you're back. It's been a while. It's been a while, but I'm delighted to be here. So I want to start with the state of the UK economy itself, because I think there's this idea out there that apart from people who live in castles, like we're all poor and living on roadkill and tree bark in like a hopeless backward economy wishing we were all rich and american with good teeth but i mean actually i think we're doing all right actually aren't we this year we're definitely doing all right it's not been a vintage few years for the uk economy it's been growing but this year suddenly the growth has picked up and that's not what we expected so we've had unexpected good news so if you compare And we, because we're quaint and do things differently, we have monthly GDP numbers.

1:54Which you can argue is stupid, but anyway, here we are. You can argue is stupid, but they are season adjusted. So you can at least, in theory, just have a look at how well are we doing in August, which is the latest data compared with December. So how much growth has there been so far in the eight months of 2026? What do you reckon? Oh, God, I don't know. You're putting me on the spot now. Tell me, tell me. Tell me, 1.8%. That's okay. Two thirds of the way through the year. That's pretty good. If we get to the end at that growth rate, we'll do better than America this year. I like how whenever the UK puts out growth numbers and they're quite good, everyone's like, oh, the stats must be wrong.

2:33There must be some. Well, our stats and our GDP stats have been wrong quite often in recent years. So you have to treat this with a little bit of caution. But so far this year, it looks OK and much better than we expected because Britain is like the whole of Europe, but this is not a UK thing. We import a lot of energy because we don't have that much ourselves. Even if we did more drilling in the North Sea, we'd still be big energy importers just like the rest of Europe. So when the price of energy goes up, we just get poorer. That is just the simple maths of it, because what we import gets more expensive and what we export gets relatively cheaper.

3:17And that's just tough. It's not very pleasant. So you would think that when we think about the budget, the big picture, what the expectation was, was it was all just going to be doom and gloom. Because we're poorer because energy prices have gone up. Not our fault. Someone else has created some war somewhere which has made oil and gas prices. Or Muppets somewhere, yeah. Go up and then you have to distribute the losses. Now, there is going to be a bit of that in the budget. It's going to be very much brushed under the carpet. So there's two things going on. One is that we are poorer because energy prices have gone up, but also the growth figures and the economic figures have just been better than we feared.

3:55Yeah, yeah. So some of that kind of relative cheerfulness for us, that comes relative to expectations, but also like the IMF gave us a pat on the back recently, right, and said you're kind of doing the right things. Yeah, so in the annual meetings which have just taken place last week in Bangkok, remember in April the IMF said the UK would be the hardest hit country from the energy prices pretty much in the world amongst advanced economies. And now they're saying, oh, actually, A, that wasn't right. I mean, all European countries were pretty much hit in the same way. And now they were praising the UK essentially for having more concrete plans to get its budget deficit down, the amount it borrows down, than other similar countries.

4:40And that's also pretty much true. We do actually have not just promises to get the budget deficit down. It has turned into law. So the tax increases are on the books already and they are coming in. Yeah, you know, you look around the world at other big economies, like the US is making, from what I can tell, zero noises about budget consolidation and spending less money and yada yada. France is France. But we do borrow a lot as a country. And also, even though the current Labour government has got a massive, massive majority in Parliament, it finds it quite difficult to cut spending without facing rebellions from backbench MPs.

5:20OK, we don't have people setting fire to things in the street, but we do have quite stubborn backbenchers. So the new Chancellor, John Healy, took over from Rachel Reeves when Keir Starmer flipped into Superman style, turned into Andy Burnham. So John Healy, the new Chancellor, what has he been signalling? Because normally you get lots of little kind of leaks in the two or three weeks ahead of a budget so you kind of know what's going to be in it. Either I haven't been paying attention properly or we're just not getting so many leaks this time? We're absolutely not getting so many leaks and I think that's a good thing because last year things got completely out of hand when there was a leak a day and then the Chancellor went on TV to suggest that she was going to put up income tax and then she didn't do it and it was U-turns and no one knew where they showed it.

6:09Now, I think there's enough, you don't need leaks to know what's going to be in the forecasts because they come from the Office for Budget Responsibility, an independent body, and if you've studied them enough, you sort of know where they're going to come out. And so they're not going to be good. They're going to be worse than the ones they put out in March, but not disaster. For what? For growth? For growth and also public finance. So all of them are going to be a little bit challenging. And the biggest moving part is going to be an increase in the forecast amount of interest that the UK needs to pay on government debt.

6:44That's going to be the biggest thing, but also probably a little bit of a long term growth downgrade, partly because migration is coming in much lower than we previously thought. And that's politics is doing that. And that's not great for the short term public finances. And also because the inflation we're seeing is sort of the wrong sort of inflation because it's energy again. And that means you don't get the tax revenues because it's not going to go into wages so much. But you have to pay out more on pensions and other Social Security benefits because they go up with inflation. So it's not the sort of inflation that comes from just everyone like going wild and spending money and having a great time.

7:26It's the sort of inflation that comes from, hang on, have you seen my energy bills this month? That's not my food bills and all the rest of it. You know, cost of living is a thing. But so like you touched on borrowing costs and that's important, right? Because if governments want to spend money on like usual things that governments spend money on, schools, hospitals, defence, that kind of thing. They can either cut money in one place to spend it somewhere else. Fine. Rob Peter to pay Paul. You can sell stuff, privatisation, but I don't think we've got anything meaningful left to privatise, right, as a country?

7:59Not really. And the way we do the accounting these days makes that pretty impossible for day-to-day spending. Yeah, yeah. So then you can either raise taxes or, drumroll, borrow the money with bonds. The UK has pretty much the highest borrowing costs anywhere in the developed world. How have we ended up in this ridiculous situation? It's a combination of a couple of things. So clearly we moved from being pretty average among the G7, so that's the developed world, to being the highest. And we first hit the highest in 2022 when we had his trust as our prime minister, Kwasi Kwarteng as our chancellor.

8:39and they went, I think it'd be fair to say, a little bit bonkers with assumptions that if they cut taxes a lot, they would get loads of tax revenue in and no one believed them. She's got a book coming out, apparently, just before the budget, called something like The Bank Job, basically trying to lay all the blame at the Bank of England. Yeah, it's pretty absurd. It's sort of almost endearing now in its absurdity. yes she's moving into national treasure kind of territory yeah i look forward enormously to reading this book but so yeah we pay a lot to borrow money 10-year government bond yields that's the baseline for what we pay to borrow 10-year money is 5.4 percent pretty high 30 years 5.9 ouchie and it's not just and we should finish the thing about because it's not just her so that's when we moved to the top and then we have stubbornly stayed there, partly because our inflation problem is worse than other countries.

9:37And because investors from around the world still think the Bank of England is reasonably credible in getting inflation down, but they think it's going to have to have higher interest rates for longer. And so that's why then our 10-year government borrowing cost is pretty high and certainly higher than other European countries where people think the European Central Bank won't have to keep interest rates as high as that. So that's roughly why we're still at the top. Essentially, people think we've got a bit of an inflation problem. People don't like the UK's public finances overall. We're still borrowing 4 % of national income.

10:12And even though it's planned to come down to about two, which would then be sustainable, you need to see it happen, not just hear the promises. So this is, you know, I'm always banging on about this, but people seem to think often that financial markets and real life are two different things and that financial markets and politics are two different things. That could not be more wrong because the amount that we pay as a country to borrow money is a huge input into political decisions that people like John Healy and Andy Burnham make. So Rachel Reeves, a previous chancellor, she used to say all the time, like we're spending as a country four times as much on debt repayments than we are on nurses.

10:54And one pound in every 10 pounds the public sector spends is on debt repayments. So given that bond yields are very high now and the borrowing money is very expensive, how much does that box John Healy in? Well, it boxes him in a lot. So we shouldn't expect any largesse from John Healy, because even though the economy is doing OK this year, the forecasts aren't going to be great. They will show that the underlying sustainability of the UK public finances is a little bit more stretched than it was at the start of the year, which is exactly what you expect when there's an energy crisis. So none of this is surprising.

11:31But one thing Healy can't do is just say, oh, you know, I can't cut any more out of spending. People don't want to spend too much more on their taxes. So I'm just going to go cap in hand to the bond market and they'll pay up. That doesn't work right because the more you borrow, the more you have to pay. So are we expecting any more borrowing out of the government, any higher forecasts? We're certainly expecting that the deficit reduction path is going to be slower. So it's not going to be as good as it looked in March, which didn't have any of the Gulf War aspects in those forecasts. So we'll see a slower path of deficit reduction.

12:13We're almost certainly going to see some tax increases, perhaps a little bit delayed, so not immediate. OK. And probably, and this is me speculating wildly here, maybe well on the banks who've done quite well this year with higher interest rates. a few billion here or there such that by the end of the decade it won't look as if the government is making the problem worse. I'm sure that's going to be the case and the FD had a story about this last week. So it will be what in the terms are scorecard positive which means there will be net spending cuts or tax increases by the end of the decade in cash terms.

12:52And so there will be a little bit of help here and there, some breathing space that's pretty much been promised for this winter. I've been promised growth in every postcode, Chris Giles. How many postcodes do you live in?

13:06But do you think the mission... So one way that chancellors, that budget day tends to go wrong for them is that they put out all of their announcements and everyone goes, OK, OK, fine. And then right at the end of that process, they say, and this is how much money we're going to borrow in the next fiscal year. And quite often the gilts market, so the UK government bond market goes, how much? So that's not an option that's open to him that he can just jack that up. Because the numbers are big anyway. So this year, this financial year, the gilt issuance is somewhere around the£250 billion mark, which as a share of the economy is somewhere between 8 % and 9 % of GDP.

13:43And that's what the bond market looks at. That's the figure, the issuance figure. So that is almost certainly going to rise for next year, but probably not very much. And so just quickly, like for John Healy, what will success look like on budget day? Is it doing no harm and not spooking the horses? Yes, I think so. It's clear that this is not going to be a big tax reforming budget. It's pretty much steady as she goes. And so if he can get out of it saying, look, I'm responsible. The public finances look OK. We're still going to balance the current budget by the end of the decade. There's a little bit of a buffer still around that.

14:26I haven't splurged money around. I haven't just borrowed lots more to spend. Clearly, there's going to be a little bit of extra borrowing in the short term because of the energy crisis. And we've got to help people out. But it's temporary and it's targeted. all the things the IMF told us we should be doing. But our big plan, which is ongoing, is to get the deficit and the debt levels under control. And that's still on target. And that has been measured by an independent body. And they agree with us. If you can do that, Mr Healy, if you're listening, then you should keep the market on side. At least for this year.

14:59At least for this year. Next year, it looks rather harder. But that's what his ambition is for this month's budget. Yeah, it sounds like a good recipe to me. Chris, thank you. We're going to come back in just one second with Long Short.

15:18Okie doke, it is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Chris Giles, econ nerd, what are you saying? Well, it's pretty cold in Europe right at the moment. It is. It is. And natural gas prices are at the highest this year. They've tripled this year and they keep on going up and up and up. So I'm going to go long Polonex jumpers because not only am I wearing one right now, but I think lots of people will be wearing their woolies just to keep a little bit longer before they put the heating on at home. It's your signature look and I'm going to get mine out the cupboard quite soon, I think.

15:57So, yeah, long Polonex boys and girls. I am short techno babble. I feel like it's gone too far. So the NVIDIA CEO Jensen Wang did an interview in Germany with Friedrich Mertz, the German chancellor, and he said that Germany should embrace AI because, and I quote, in the future, I believe that most people here in Germany will mostly work inside a digital twin of their company. They will build digital cars. Those cars will have digital brains. like what what are you talking about like it makes literally no sense like it makes no sense at all it's just i'm i find my patience for this stuff is wearing incredibly thin now just say ai is going to be big like it will be quite useful and big like fine yeah but this stuff about digital brains i'm just like over it why do you need a twin what's the other twin going to be doing just knock it off guys enough techno babble shut up yes we've had enough thank you so much speaking of having enough that's it from us for today we will be back in your ears on Thursday Chris Giles thank you so much for coming on it was a pleasure and we will be back on Thursday so listen up then