Britain’s new government is poised to unveil a budget on October 30 that aims to bolster investor confidence, with global asset manager PIMCO indicating a tighter fiscal outlook than market speculations suggest.

Led by Prime Minister Keir Starmer, the Labour government, which returned to power in July, faces scrutiny over potential borrowing increases.

However, PIMCO believes the government’s initial tax-and-spending plans will not significantly disrupt financial markets.

Will UK’s new budget alleviate investor worries?

PIMCO’s Senior Vice President, Peder Beck-Friis, assured that despite concerns about increased borrowing, the government is likely to uphold fiscal restraint, contributing to a gradual reduction in the UK deficit over the coming years.

He noted that financial markets may be pricing in a higher terminal interest rate than necessary, with the outlook for inflation and growth appearing more subdued than currently anticipated.

As inflation is expected to ease further, there may be opportunities for the Bank of England to lower interest rates, following trends set by countries like the US, Canada, and New Zealand.

UK government bonds May offer value

British government bonds, or gilts, have recently faced underperformance due to inflation concerns and speculation regarding heightened government borrowing.

Following weaker-than-expected inflation data, gilts saw a notable price surge.

Beck-Friis emphasized that gilts remain attractive not only for their yield but also for potential long-term capital appreciation.

The outlook for gilts is positive, especially as the market adjusts to the prospect of additional Bank of England rate cuts once inflation begins to decline.

Some investors prefer gilts over US treasuries

In contrast to rising deficits in the US, the UK is anticipated to adopt a more conservative fiscal strategy.

PIMCO’s Chief Investment Officer for Global Fixed Income, Andrew Balls, remarked that gilts offer better value compared to US treasuries due to expected fiscal restraint.

He also highlighted that gilts represent one of the most appealing global sources for duration, making them an attractive long-term investment.

Labour’s budget likely to emphasize growth

PIMCO forecasts that the UK’s economic growth will remain modest, affected by weak productivity, tighter immigration controls, and increased absenteeism post-pandemic.

Growth is projected to hover around 1% to 1.25% annually, mirroring trends in the eurozone.

Balls identified one area of optimism: the government’s plans to reduce red tape and expedite infrastructure and housing projects.

If successfully executed, these initiatives could enhance productivity and foster economic expansion in the long run.

Beck-Friis expressed optimism that the upcoming budget would not lead markets to question the UK’s fiscal credibility, which was restored following the market chaos triggered by Liz Truss’s tax cuts two years ago.

As inflation continues to decline, gilt yields are expected to become more appealing, offering both yield and potential capital gains.

This could lay a solid foundation for the UK’s economic recovery, with bondholders likely to benefit from holding gilts in the coming years.

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Foreign investors in the UK, including ultra-wealthy non-domiciled individuals, are advocating for an Italian-style flat-tax regime to prevent a significant outflow of wealth from the country.

With the government’s budget set to address the contentious non-dom tax status, lobby groups such as Foreign Investors for Britain (FIFB) and Oxford Economics have proposed a tiered tax system aimed at retaining affluent non-doms, CNBC reported.

This proposal emerges amid increasing pressure from the Labour Party to abolish the non-dom status entirely, which could have profound implications for the UK economy.

Proposed tiered tax regime to retain foreign wealth in Britain

The lobby group FIFB, in conjunction with the think tank Oxford Economics, has outlined a new tax framework designed to keep wealthy non-doms in the UK.

Under this proposal, individuals would pay an annual fee based on their net wealth, allowing their foreign earnings and non-UK assets to remain exempt from UK taxation.

Specifically, individuals with a net worth of up to £100 million would pay an annual fee of £200,000, while those worth over £500 million would pay £2 million annually.

This tiered approach contrasts with Italy’s flat-rate tax, which charges all non-doms a standard annual fee of €200,000.

This new system aims to provide stability for non-doms, who are increasingly considering leaving the UK due to government discussions about scrapping their tax advantages.

The proposal seeks to balance the need to retain wealth in Britain while generating substantial tax revenue.

UK non-dom status at risk in the upcoming budget

The UK’s non-dom status, a tax rule that dates back to colonial times, permits individuals domiciled abroad but residing in the UK to avoid paying tax on their overseas income and gains for up to 15 years.

As of 2023, an estimated 74,000 non-doms reside in the UK, a rise from 68,900 in 2022.

While the regime has long been politically contentious, it faces renewed criticism from the Labour Party, which has pledged to abolish it and curb the use of trusts to shelter overseas assets.

Chancellor Rachel Reeves is expected to address the future of the non-dom regime in the budget set for October 30.

With the public finance funding gap now reported to be £40 billion, compared to previous estimates of £22 billion, tax increases are anticipated.

The Labour Party contends that abolishing the non-dom system could yield an additional £2.6 billion during the next government term.

However, some experts warn this could lead to capital flight from the UK, costing the Treasury in the long term.

According to research by Oxford Economics, the UK risks losing substantial investments if the non-dom status is abolished.

Their survey reveals that 72 non-doms have collectively invested nearly £8.5 billion into the UK economy.

Some non-doms have already begun moving their wealth; Oxford Economics estimates that £842.2 million has been divested in anticipation of potential changes.

The survey also indicates that if the proposed tiered tax regime were implemented, only 13% of non-doms would still consider leaving the UK.

Conversely, nearly all respondents (98%) indicated they would likely relocate their wealth elsewhere if the tiered system is not introduced, with attractive alternatives including Italy, Switzerland, and Dubai.

Labour rethinks non-dom crackdown amid business concerns

The Labour Party’s stance on the non-dom issue has evolved recently, with Chancellor Rachel Reeves reportedly reconsidering elements of the proposed crackdown.

While addressing tax fairness has become a key component of the party’s manifesto, it now seems to be softening its position in response to concerns from business leaders about driving wealth creators out of the UK.

During the Labour Party’s first International Investment Summit, Prime Minister Keir Starmer sought to reassure investors by promoting the UK as a destination for growth and wealth creation.

While the UK’s non-dom regime has historically attracted foreign investment, the ongoing debate regarding its abolition has raised concerns about Britain’s competitive ability.

As the UK government prepares to make critical decisions regarding its tax policies, the outcomes of these discussions could have a lasting impact on Britain’s economic landscape.

The introduction of a tiered tax regime may present a compromise that keeps wealthy non-doms in the UK while addressing concerns about equity in the tax system.

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The launch of World Liberty Financial (WLFI), a cryptocurrency endorsed by Donald Trump, has encountered significant challenges, raising only $11.8 million within its first 24 hours—far short of its ambitious $300 million fundraising goal at a $1.5 billion valuation.

Designed as a governance token, WLFI allows holders to vote on key decisions within the platform.

However, with just 9,050 unique wallet addresses created against an expected 100,000 whitelisted investors, the project faces substantial obstacles in the competitive digital asset landscape.

Why WLFI’s ambitious goals are failing to materialize

Marketed as a “crypto bank” that enables users to borrow, lend, and invest in digital currencies, WLFI’s co-founder, Zachary Folkman, previously expressed optimism about the project’s anticipated popularity and the number of whitelisted investors.

However, WLFI’s launch has not gone as planned. Data from Etherscan reveals a stark discrepancy between the number of whitelisted investors and those who have purchased tokens.

To date, only 9% of the projected investors have participated, leaving the project far from its $300 million target.

Technical setbacks hinder WLFI token sale

A significant part of the disappointing launch can be attributed to technical difficulties.

The exclusive marketplace for WLFI suffered repeated outages during its debut, displaying a “We are under maintenance” message to prospective investors.

These ongoing issues likely frustrated many potential buyers, who were unable to access the platform when needed.

Additionally, World Liberty Financial has not yet released an official white paper or a formal business plan, leaving many would-be investors unclear about the project’s long-term vision.

WLFI’s status as a Regulation D token offering poses another substantial challenge.

This regulation allows projects to raise capital without registering securities with the US Securities and Exchange Commission (SEC), but it comes with stringent requirements that limit the pool of potential investors.

Only accredited investors—those with a net worth exceeding $1 million—can participate, significantly narrowing WLFI’s market and potentially explaining the shortfall in expected investors.

Limited voting opportunities for WLFI token holders

Although WLFI is marketed as a governance token, there are currently no decisions for token holders to vote on, as the crypto bank associated with the digital coin is still in development.

The platform is awaiting approval from Aave, a leading crypto lending platform, and until this process is finalized, WLFI holders are left with little more than promises of future utility.

This uncertainty has made many investors hesitant, as the token’s value remains speculative without a functioning platform.

While Donald Trump’s endorsement has drawn attention to the project, the path to recovery remains unclear.

WLFI has faced criticism for its lack of transparency, with no white paper or comprehensive business plan available to the public.

Furthermore, fine print on World Liberty Financial’s website indicates that Trump and his family may receive significant tokens and fees from the project, raising concerns about potential conflicts of interest.

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In a significant restructuring effort, McKinsey & Co., the prominent US-based consulting firm, is poised to overhaul its operations in China, which includes laying off approximately 500 employees—roughly one-third of its workforce in the region.

This move follows a strategic pivot away from government-linked clients and is part of broader changes aimed at mitigating security risks associated with conducting business in the country, as reported by the Wall Street Journal.

According to sources familiar with the situation, McKinsey has begun to decouple its China unit from its global operations.

This shift reflects an increasing concern over the complexities of the Chinese market and the associated risks.

Over the past two years, the firm has systematically downsized its staff across Greater China, which encompasses Hong Kong and Taiwan.

As of June 2023, McKinsey had reported nearly 1,500 employees on its Greater China website.

While McKinsey did not provide immediate commentary in response to inquiries from Reuters outside regular business hours, the firm’s restructuring efforts underline a significant transition in its approach to the Chinese market.

Compounding these operational challenges, McKinsey is reportedly on the verge of reaching a settlement with US prosecutors concerning its previous engagements with opioid manufacturers.

Insiders indicate that the consulting giant could pay upwards of $500 million to resolve ongoing federal investigations into its role in supporting opioid sales, a matter that has drawn considerable scrutiny.

This forthcoming settlement, which is expected to be announced in the coming weeks, would conclude both criminal and civil inquiries led by the Justice Department.

Although the details are still being finalized and subject to change, the implications of this settlement are substantial for the firm. Representatives from both the Justice Department and McKinsey have declined to comment on the matter.

This settlement would add to the financial burdens already faced by McKinsey, which has previously settled claims with various US states regarding its advisory roles for drug companies linked to the opioid crisis.

The firm, which reported a record revenue of $16 billion last year, had already agreed in 2021 to pay substantial sums to settle accusations that it contributed to the opioid epidemic by providing sales strategies and marketing guidance to manufacturers of addictive painkillers.

Despite these allegations, McKinsey has maintained that its past activities were legal. In 2019, the firm pledged to cease consulting for companies involved in producing opioid-based medications.

In a statement on its website, updated as of May, McKinsey acknowledged that its prior work with opioid manufacturers, while lawful, did not meet the elevated standards it sets for itself.

The firm noted that it has invested nearly $1 billion since 2018 to enhance its risk, legal, and compliance operations, alongside implementing a more stringent client selection process.

Ongoing investigations by US attorney’s offices in Boston and Roanoke, Virginia, in conjunction with Justice Department lawyers in Washington, highlight the extensive legal pressures McKinsey faces.

Thousands of state and local governments are pursuing claims against opioid manufacturers and distributors, aiming to recover the billions spent on addressing the fallout from the opioid crisis.

Additionally, reports from Bloomberg Law indicate that a US judge has approved McKinsey’s proposal to pay $230 million to settle claims from cities and states, although the firm continues to navigate potential legal challenges related to its previous consulting work.

From 1999 to 2021, opioid overdoses have claimed nearly 645,000 lives in the US, encompassing both prescription and illicit substances.

The decade of the 2010s saw a troubling surge in overdose deaths, a trend that has been exacerbated by the emergence of synthetic opioids in the aftermath of the Covid-19 pandemic, leading to hundreds of thousands more fatalities.

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Goldman Sachs and Amundi are showing increasing confidence in UK bonds, a reflection of optimism that the new government will manage the country’s finances responsibly while aiming to stimulate economic growth.

With Chancellor of the Exchequer Rachel Reeves set to unveil her first budget on October 30, bond markets are making a clear bet that the UK won’t experience another fiscal crisis like the one triggered by Liz Truss’s mini-budget in 2022.

According to a Bloomberg report, Amundi, Europe’s largest asset manager, has shifted its exposure away from European bonds to focus on UK debt.

Similarly, Goldman has advised clients to buy gilts ahead of the budget announcement.

BlackRock has also upgraded UK bonds from neutral to overweight, while Legal & General Investment Management and Aviva Investors are adding exposure to UK debt as well.

A bet on fiscal prudence and market discipline

The influx of funds into UK gilts reflects investor confidence that Reeves will balance her budget while tackling the £22 billion hole in public finances.

Although the national debt continues to grow, Reeves is expected to exercise fiscal discipline.

Daniel Loughney, head of fixed income at Mediolanum International Funds, said, “She will want to maintain some kind of perception of fiscal discipline,” signaling why his firm is also overweight on UK bonds.

Part of the optimism around UK bonds is fueled by expectations that the Bank of England will soon begin cutting interest rates more aggressively.

This sentiment strengthened after recent data showed a significant slowdown in inflation. John O’Toole, head of multi-asset investment solutions at Amundi, expressed confidence, stating,

The UK should benefit from slowing inflation and fiscal discipline.

Gilt underperformance won’t last, say strategists

Despite a challenging month for UK bonds, with the 10-year yield climbing over 30 basis points since mid-September, many believe this underperformance will reverse.

Goldman Sachs strategists, including George Cole, remain confident that a “fairly gilt-friendly” budget will help bonds recover.

Meanwhile, BNP Paribas economists expect the government to use the budget as an opportunity to send a strong message of fiscal responsibility, which could ease market concerns.

“Fixed income markets are likely to balk at anywhere near to half of this sum given the impact of issuance on yields,” warned Mark Dowding, chief investment officer at RBC BlueBay Asset Management, highlighting the potential effects of significant borrowing on yields.

Changes to fiscal rules and market expectations

Investors are anticipating some fiscal maneuvering in Reeves’ budget, including potential tax hikes and changes to the self-imposed fiscal rules that currently limit government borrowing.

While some are concerned about moving the “fiscal goalposts,” Sunil Krishnan, head of multi-asset funds at Aviva, reassured investors, saying,

We understand the concerns about moving fiscal goalposts, but unlike the Truss mini-budget, we expect the Office for Budget Responsibility to be an important check on government plans.

One potential move could involve excluding the Bank of England’s balance sheet from national debt calculations, which would free up an additional £16 billion for borrowing.

A more aggressive option could provide up to £67 billion in borrowing headroom, although this would likely cause concern in the bond market.

Citigroup economist Ben Nabarro recently warned of the risk of a “buyers’ strike” if Reeves’ budget leads to borrowing increases of around £50 billion next year, given that the bond market is already dealing with a record supply of debt this year.

Careful balance between borrowing and investor trust

While investors remain cautiously optimistic, they trust Reeves to tread carefully.

Most believe she will increase borrowing modestly to maintain investor confidence.

Barclays Plc echoed this sentiment, suggesting Reeves may even wait until 2025 to adjust the fiscal rules, allowing more time for a proper assessment.

Moyeen Islam, a rates strategist at Barclays, remarked, “To have had one gilt crisis triggered by proposed fiscal expansion might be regarded as a misfortune, but to have two will look like carelessness,” as he recommended buying gilts over German bonds.

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