One winner from the Budget?

Good afternoon. This is your midday market update from City AM.

Few industries are expecting a big boost from this week’s Budget. 

Andy Burnham did announce a business rates cut for pubs and music venues over the summer – but that could prove the only time the words “tax cut” appear anywhere in Chancellor John Healey’s speech to the Commons on Wednesday.

I asked RSM chief economist Tom Pugh whether he thought any other parts of the economy can expect a reprieve.

His response: “I don’t think so – I doubt it.”

“It just becomes expensive. Maybe you can do something with hospitality but once you go beyond that, the pressure to do things across the board just becomes so big.”

But one sector that could be smiling come Wednesday afternoon is defence. Over the weekend, Healey confirmed plans to up the government’s defence budget to the tune of billions of pounds, backing British defence manufacturers and military technology firms while seeking to boost domestic jobs.

The news sparked an investor pile-in into British defence stocks on Monday morning. Warship maker Babcock shares were up nearly five four per cent, while Melrose was up 3.6 per cent and BAE Systems was up 2.1 per cent.

It’s unsurprising that Healey wants to spend more on defence. Indeed, it would have raised more eyebrows had he decided not to.

Britain’s new chancellor resigned as defence secretary earlier this year, supposedly on the grounds that Keir Starmer was not prepared to allocate enough resource to defence. The move accelerated Starmer’s demise from Number 10 and handed Healey a promotion to Number 11 under Burnham.

“Defence has the loudest claim for more funding, not least because the Chancellor previously ran the department and called the inherited plans inadequate against a backdrop of rising geopolitical fragmentation and risks,” said Peel Hunt chief economist, Kallum Pickering.

“Although higher capital spending supports growth only gradually, well-targeted investment can expand supply and support a productivity recovery over time – which can make debt financing more acceptable even at high rates of interest.”

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How much spending on defence is the right amount?

Healey is unlikely to lay out a clear path to getting defence spending up to 3.5 per cent, the level Nato members have pledged to hit by 2035 and a move that would cost the Treasury tens of billions of pounds.

Critics will lay into Healey if the defence spending rise is meagre, given the weight that his earlier resignation carried. But, warned NIESR economist Ben Caswell, there is also the opposite risk to the economy of overspending.

“Our concern at the moment is that the UK economy is already kind of running hot,” Caswell told me in an interview.

“Another injection of spending from the government, [which will act] like a demand stimulus, is probably not the right measure at this time, when inflation and growth is already above trend, above target.”

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