UK Labour Government's First Budget

Investing.com – The new Labour government announced its first budget last week. Deutsche Bank (ETR:DBKGn) is analyzing whether the UK public finances are on a more stable footing.

UK Chancellor Rachel Reeves detailed £40 billion of tax hikes to address shortfalls while also adding just over £30 billion in annual borrowing to the previous government's Spring Budget projections.

Following the budget, gilt yields have risen. Short-term interest rate expectations have increased, and higher interest costs have effectively added another £5 billion in debt servicing costs to the Chancellor's bill, further diminishing her fiscal headroom.

>“To be sure, for the Autumn Budget to pay off, we will need to see a bigger growth dividend from both day-to-day spending and capex. At present, the OBR expects sustained growth improvement to only crystallize between 2030 and 2035. The faster it does, the better,” analysts at Deutsche Bank said, in a note dated Nov. 5.

Following the Budget, Reeves noted that the public finances were now unequivocally on a stabler footing. However, “despite the big tax raising event, big challenges remain for the Chancellor. New fiscal rules have shifted the fiscal headroom arithmetic – but given that the Chancellor has opted to use much of this, fiscal constraints will continue to be a big feature of future fiscal events,” the German bank added.

More risks linger going forward.

>“The Chancellor may have to return to raise more taxes or cut spending – or more borrowing may ultimately be inevitable over the course of parliament's session,” Deutsche Bank said.