Deutsche Bank flags bigger-than-expected UK investment push ahead of Budget

 Chancellor Healey is likely to surprise markets on Wednesday with a bigger investment boost than Deutsche Bank had assumed, a £20.4 billion expansion that would not affect either of his fiscal rules, the broker said on Monday, citing weekend Financial Times reports.

The FT said the money would go to public financial institutions over five years: an extra £15.4 billion for the National Wealth Fund and another £5.4 billion in investment capacity for the British Business Bank, aimed at creating more than 100,000 jobs in sectors such as AI, defence and green energy in ten years’ time.

Deutsche Bank had assumed an £8 billion expansion in the Budget, followed by an equal increase in next year’s Spending Review. It expects spending through these institutions to be £12.7 billion above that assumption.

The spending would come late. The FT said any increase would start only in the 2028/29 financial year and be "raised gradually by about 2031/32".

The Times reported part of the extra spending would go to defence, with Healey expected to "unveil billions of pounds of new defence spending" for drone makers and military technology companies, a "down payment" towards his goal of lifting UK defence spending to 3% of GDP by 2030.

Part of the package would be paid for by tax agency HMRC recovering tax debts directly from taxpayers under greater powers, which the FT said would bring in £4 billion in extra revenue. Deutsche Bank had assumed £2 billion from HMRC tax avoidance programmes.

Including those savings, the broker projects cash borrowing will rise by close to £10 billion a year over the second half of the Office for Budget Responsibility’s forecast period, leaving the gross financing requirement at just over £250 billion in 2030/31.

Deutsche Bank said markets will still be sensitive to higher borrowing, and that one large Budget Day risk has been removed, with markets likely to adjust before Oct 28.

The broker gave three reasons: the spending does not affect the fiscal rules; a "steady Budget" would not sell with the Labour Party or voters, and the spending could lift GDP by 0.5% by 2031/32, it estimates; and the Chancellor’s room to borrow may be better than expected.