Beyond the politics: what does the UK budget mean for investors?

What’s happened this week?

James: Hello, it's Friday, the 28th of November. When I was thinking about this week's video, I thought we'd call it the ‘three Bs’ budget, backbenches, and bond markets. But as I've gone through thinking about what we're going to be talking about, actually there's lots of different Bs that we're going to be going through, not just those three. So think of it as a bit like Sesame Street. This week's budget is going to be brought to you by the letter B.

So I'm going to start with an all-time high. We've had lots of those through the course of 2025, and generally they've been a course of celebration, stock markets hitting all- time highs. But this one, I'm afraid, is B for burden. The tax burden in the UK is going to hit a record high in 2030, presuming everything carries on as expected following this budget at a level of 38% of GDP. So that's, I think a nice way of sort of summarising the impact of this budget, and why has it been a sort of a pro-tax budget? Well ultimately, it's that balance between those other two very important Bs, the backbenches, and the bond markets. If you take a step back from all of these factors, it's interesting to think that in many ways Liz Truss has sort of cast a shadow over this budget in one particular way which is that we've had all these leaks on the way perhaps testing different policies on the fly, sampling responses to them and then adjusting. As we go, but it really has been an extraordinarily leaky budget with the sort of final flourish quite incredibly coming from the Office of Budget Responsibility, the OBR, also essentially leaking the entirety of the budget, all the details really, as the Chancellor was sat in the House of Commons. A pretty extraordinary budget in many different ways but oddly enough it has not really created any kind of waves in markets. The OBR leak caused a bit of gyration but overall I suppose in many ways because you've had all these leaks on the way because the chance was so desperate not to surprise markets or to surprise backbenchers and cause issues either which way, it's like unpicking the corner of your Christmas present under the tree, you already know what's coming, which means you don't get a positive surprise, you also don't really get a negative surprise. And really, over the course of the last couple of months, we've had so much information drip-fed and then retracted and then policy flexes and everything else, there were very little surprises. The markets have sort of bumbled along. There's been a little bit of a reduction in gilt yields. The stock market has taken it fairly well, but by no means was there any sort of real surprise either which way.

So the purpose of this budget was ultimately balance, balancing the books, balancing of various interests, and making sure no one particular surprise really stole the day. In terms of balancing the books, there is now a fiscal buffer in place, and it's looking healthier than it was a year or so ago. Certainly in the run up to the budget, there was a realisation that that sort of fiscal buffer towards the end of the parliament needed to be more material. We were sort of running up against it. And that's not least because of the way that the OBR has changed their productivity and growth forecasts and all the rest of it. What's important is the fact that the government have tied themselves in knots around this budget in order to maintain the confidence of the bond market whilst also adhering to the fiscal rules at least demonstrates how seriously the fiscal rules are being taken by the government. While it made it very difficult for them because they had to try and achieve a result that didn't overtly breach any manifesto pledges but nevertheless achieved that sort of balance in the long run which kept markets happy. So again you know what it reflects is at least a desire to perhaps achieve the almost impossible of balancing the books in the long run.

There is a risk of course because this expected taxation is many years into the future, it is possible there's a degree of another B bluster in there. Is it conceivable that these initiatives actually don't get brought in when the time comes? Could it be that we're so close to the end of the parliamentary term that it's deemed to be politically impossible to bring some of these new taxes in, or might it be a case that they're almost sort of put up there as a decoy so they can be pulled away, taken off again, and almost presented as a tax break as we get into the re-election cycle. There's lots of different ways this could all play out, but it's quite unusual to see taxation put that far ahead. Remember the old days when budgets were really about sort of taxation on tobacco and alcohol and that would be put on the night of the budget or in very short order afterwards rather than many years into the future.

What is the impact on investors?

What is evident again from the budget is it's not really heavy on policy. It seems to be more politics, more sort of short-term rather than long-term in nature. And again, perhaps sort of demonstrates that while the Labour Party came into power last year with a with a stonking majority, in some ways that support base is actually quite thin and if opinion polls would be believed has already materially evaporated. So again, another interesting feature of the budget, because a lot of these tax increases have been deferred, it sort of pushes that inflationary impact of that, or the potential inflationary impact of that, down the road as well. It's not today's problem and that then leaves space for another B the Bank of England to continue down the track of cutting interest rates. As of today the expected probability of a rate cut in December is now a 90% probability in markets. So it's very firmly priced in. So the fact that we haven't got that risk of a short-term inflationary spike from taxation increases makes life easier for the Bank of England. Sadly, of course, because the budget doesn't have much in the way of G, doesn't much in the way of growth in there, that also kind of reduces the need for the Bank of England to be careful. I know they've got a very firmly inflationary focused mandate, but ultimately, if growth was going gangbusters it would be easier for the interest rates to stay elevated when the economy is a little bit shy and inflation is on the way down. It gives you much more scope to cut interest rates. So oddly enough, one of the results of this budget, because it's not particularly pro-growth, there's not a lot in there that really will get the economy going, it actually gives the Bank of England probably more breathing room to cut interests rates than they otherwise might have had.

What have we done about it?

So what does this mean for the positioning in the Liontrust Multi-Asset teams, Funds and portfolios? We remain cautiously optimistic about the prospects for the UK market. I think it's always important to remember that we invest in asset classes, whether it be equities or fixed income. We don't buy governments and as a result of that, we don't by politics or anything else. We really are not in the ballot box here. We're not voting. We're expressing a view as to whether it remains attractive from an investment perspective rather than anything else. There's nothing too concerning in there. We seem to be firmly still in the sort of 'muddle through' territory.

So the position we're in today, if you look at the status as an investment destination, has broadly unchanged. It's not materially better than it was a week ago, not particularly worse than it was a week ago. It really is very much the sort of status quo. So if you found a constructive argument for investing in the UK stock market before the budget, which we broadly did in the team, we still think it remains an attractively valued market. Lots of sort of scepticism floating around the world, weighing on prices in the UK before you even look at mid and small caps which are even more unloved. So, on balance, we don't see anything in that budget that sort of changes that thesis. The fact that government continues to be focussing on fiscal rules and being careful with balancing the books means that on balance, the gilt market remains fairly attractive. We are neutral on our gilt exposure. We have it as a 3 out of 5 in our tactical asset allocation process, whereas we have the stock market and indeed smaller companies in the UK as a 4 out of 5. And so, that really is business as usual in that sense. We continue forward with those scores. There's nothing fundamentally concerning or particularly positive in this budget. And so overall, we maintain those positions in the Funds and the portfolios today.

That's it from me. Have a great weekend when you get there and we'll see you next time.