The chancellor Jeremy Hunt unveiled a multi-year programme of fiscal tightening, although it is somewhat backloaded – which is unsurprising as the next election will probably take place in 2024 – and less aggressive than we had predicted.

In a sharp reversal from the Truss government’s ‘Growth Plan’ of just a few weeks of ago, £45 billion of tax cuts are being replaced by £55 billion of fiscal tightening, broken down into £30 billion of spending cuts and £25 billion of tax rises.

Still, the Office for Budget Responsibility (OBR) notes that as a result of the announcements, ‘the tax burden rises from 33.1% of Gross Domestic Product (GDP) in 2019-20 to 37.1% of GDP at the forecast horizon’. That said, the tax rises, which are equivalent to an average of 1.25% of GDP over the plan’s five-year forecast horizon, are well below the spending increases, which amount to some 3.75% of GDP.

This means that deficits and debt levels will remain quite high over the medium term – even considering rather buoyant GDP growth forecasts from 2025. Although fiscal policy becomes less expansionary this year and next, outright policy tightening will only really begin in fiscal year 2024-25.

Despite all the ‘austerity budget’ headlines in the media, this Autumn Statement cements the trend in public borrowing that has been evident since the mini budget in September: gross gilt issuance is still set to increase significantly in the years to come.

The Central Government Net Cash Requirement (CGNCR) – the amount of money the government needs to borrow every year to pay for public spending – is forecast to hit £136 billion in fiscal year 2022-23, equivalent to 5.4% of GDP. This is far in excess of the official forecast of £94 billion back in March. And in fiscal year 2023-24 the OBR expects CGNCR to surge to £188 billion – 7.3% of GDP. Over the medium term, CGNCR deficits are forecast to remain substantial at £109 billion – 3.6% of GDP – in fiscal year 2027-28.

Increased near-term borrowing reflects a sharp increase in public spending, mainly due to measures to cushion the economy from cost-of-living pressures. These measures, including the energy price guarantee (EPG), are expected to cost £43.2 billion (1.7% of GDP) in fiscal year 2022-23 and £25 billion (1.0% of GDP) in fiscal year 2023-24. High inflation and higher debt-servicing costs will also result in increased government spending.

Meanwhile, the EPG cap will be raised from the current £2,500 to £3,000 in April 2023. This means there will be some upside inflation impact but significantly less than if the support had been withdrawn entirely and the domestic price cap raised in line with market pricing to around £3,700.

As the market digests the details of the announcement, we expect increased recognition (from markets broadly and investors specifically) of just how high government spending actually is. The only time in the last decade that gross gilt issuance has been as high as it is expected to be next fiscal year (and beyond) was during the covid crisis, at which time the Bank of England was undertaking a vast programme of quantitative easing.

Now, not only is the Bank of England no longer buying bonds, it is actively selling them back to the market. To compound matters, it intends to step up its quantitative tightening by starting to sell its temporary purchases of long-dated gilts and index-linked gilts by the end of November. This represents a sea-change in the supply of gilts.

To make matters worse, the additional gilt supply comes against a backdrop of limited additional demand. It’s hard to see an environment in which the usual buyers of gilts – foreign investors and liability-driven investment (LDI) managers – feel compelled to up their purchases to keep pace with supply. Natural buyers, at these yield levels, may be hard to find. As such, we expect gilt yields to rise. Our forecast is for 10-year gilt yields to rise to 4.3% by H2 next year before eventually settling closer to 4% by the end of 2023.

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