Hana: "UK Delays Austerity, Markets Relieved but Medium-Term Uncertainty Rises"

The UK has opted not to implement immediate austerity measures in its Autumn Budget, leading to a sense of relief in the markets as gilt yields and the pound exchange rate have stabilized. However, while short-term risks have eased, concerns are mounting that medium-term fiscal burdens and uncertainties have actually increased.

On December 2, Lee Youngjoo, a researcher at Hana Securities, stated in the report "UK Autumn Budget: The Task of Uncovering Hidden Austerity" that "the UK needs austerity, but did not choose immediate tightening in this Autumn Budget." The UK is currently facing an urgent need for medium-term fiscal consolidation due to high debt levels, sustained large-scale gilt issuance expected to remain around 300 billion pounds, and mounting pressures on core public services.

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Lee explained, "The government has adopted a back-loaded structure, deferring major fiscal adjustment measures to the coming years," adding, "This approach-maintaining an austerity stance but avoiding immediate shocks-has helped ease short-term market risks and contributed to the stability of gilt yields and the pound exchange rate."

However, he pointed out that "most of the key tax increases have been postponed to 2028-2030, so the improvements projected for 2026 are merely 'superficial austerity' for show, while genuine tightening remains a challenge for the future." He also noted that the decline in gilt yields after the budget announcement "was not due to a structural restoration of confidence, but rather a correction following a recent sharp rise in rates."

Regarding monetary policy, he described the budget as "neutral in composition, meaning there is no need for the Bank of England (BOE) to alter its monetary policy path." He explained, "Fiscal policy is allowing monetary policy to continue along its existing trajectory, rather than setting a new course." Currently, markets expect the BOE to cut rates this month and to implement two more cuts next year.

As a result, the UK's medium-term fiscal burdens have become even more pronounced. Over the next three years, gilt issuance is expected to remain at a total of around 300 billion pounds, and the annual increase in departmental budgets from 2027 to 2030 is projected to be just 0.6%, effectively amounting to a freeze. On top of this, public services are already overloaded. Lee noted, "At some point, additional spending pressures are likely to re-emerge," and pointed out, "The problem is that most of the smaller, politically less burdensome revenue measures (such as property tax and pension tax adjustments) have already been exhausted in this budget."

Ultimately, there is growing speculation that discussions on raising major taxes such as income tax, value-added tax (VAT), and national insurance will inevitably resurface. Lee concluded, "While the budget has allowed markets to breathe a temporary sigh of relief by avoiding short-term burdens, the outlook for medium-term fiscal credibility has actually become even more uncertain."

He added, "In the short term, the illusion of improvement in the Public Sector Net Borrowing (PSNB) and the avoidance of fiscal shocks may help keep gilt yields stable, which can be used tactically. However, in the medium term, structural factors such as sustained large-scale gilt issuance, sales by the Asset Purchase Facility (APF), and the shortening of issuance maturities are likely to bring renewed volatility in yields and supply pressures."

He went on to recommend, "From an asset allocation perspective, a more conservative approach to medium-term duration is needed." He suggested reducing the proportion of bonds with maturities of three to seven years, shortening overall duration, or maintaining a defensive position through hedging and alternative investments.

This content was produced with the assistance of AI translation services.