The upcoming Budget is being viewed as a big risk, with bond markets in particular starting to get nervy ahead of prime minister Andy Burnham and chancellor John Healey’s first major policy announcements.
Yet the economy is in good shape and the Labour government is more than just two men, so is the market overegging the issues?
For Simon Murphy, manager of the VT Tyndall Unconstrained UK Income fund, there is a clear risk with the upcoming Budget as there are so many unknowns. However, he remains optimistic that the government can ease markets.
“We're not expecting a capitalist agenda. I'd love it to be, but it doesn't have to be. In my mind, the government doesn't need to do much, it just needs to get out of the bloody way,” he said.
He noted that the economy is “actually in really good health”, with “generally more positivity coming out of the UK” over the past few months.
He pointed to consumer confidence data as an example. While still negative in its latest reading (climbing to -14 from -17 last month), this represents the best figure since 2024.
“When you drill down into that consumer confidence data, the really discretionary elements, like willingness to make a big discretionary purchase, have really improved,” said Murphy.
While some have attributed this to a ‘Burnham bounce’, it is due to the fact that the UK has “better political stability than we've had in the past”, in the manager’s view.
As a result, the government doesn't need to do much at the end of next month.
And there could be signs that the government will be more market-friendly than currently expected. For example, Healey was vocal about the need for defence spending when he was the defence minister under Keir Starmer, pushing for the government to spend 3% of GDP on the area per year by 2030, before committing to NATO’s 3.5% target by 2035.
His stance has since softened, with rumours suggesting the now chancellor will aim for 3.5% by 2035, dropping the 2030 figure he had previously resigned over under Starmer.
“You can take that one of two ways,” said Murphy. “One is the typical, two-faced politician who says one thing in one office and another thing elsewhere. Or you can take the more charitable view, which is that he recognises the genuine fiscal hole [the Labour government has] inherited and he's not prepared to make promises he can't keep.”
David Cumming, manager of the BNY Mellon UK Income fund, noted that markets could get more jittery in the run-up to the Budget, as this time around there are expected to be fewer leaks of policy announcements ahead of time.
“I think this Budget will be quite tight – that's point one”, he said.
In terms of the content, he noted that markets are “very scared”, which is “an opportunity” for investors. If it is not as bad as feared, there could be some real upside in the days and weeks after the event.
Cumming said the market will be interested to see how much the government plans to spend and how it will be costed – particularly if taxes are to be raised.
“We'll have to wait and see on that, but the market's priced in a lot of negativity,” he said. “The public statements are that they won't break any fiscal rules and the bond market is also very clear that it doesn't want a lot more tax either, because you can only tax so much.
“Given where bond markets are, there isn't much room for manoeuvre. So I'm not expecting high drama.”
Both managers agreed the main area of focus will be on growing the economy, as chancellor Healey has already alluded to in his first speech in the role.
In particular, Cumming suggested that housing is an area that could get a lot of attention, with his own fund going overweight housebuilders as a result.
“I think you'll get some growth-friendly policies, but I don't think you'll get anything wild in terms of heavy tax or spending measures that would be disruptive,” he said.
“We're positioned in a way that gives scope for upside, given where market psychology is on the Budget. I don't know what's going to be in it, but given what they've said, it's probably not going to be as bad as the market thinks.”
For all the positivity, however, Murphy noted there was one thing in recent weeks that has given him cause for concern: the announcement of Burnham’s advisers.
These had included: Jim O'Neill, the ex-Goldman Sachs chief economist; Andy Haldane, the ex-Bank of England chief economist; and Richard Hughes, former head of the Office for Budget Responsibility. None currently hold formal roles within the government.
“That raises the question: is the government really going to be as stable and market-friendly as I hope? We'll have to see. I think it's important that they don't do anything too aggressive,” he concluded.