Making sense of macroeconomic and market moves and what the shifting landscape means for investors.
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- Rachel Reeves delivers a ‘spend now, tax later’ budget, with much of the fiscal consolidation backloaded towards the end of the forecast horizon. 85% of the projected fiscal consolidation is within the final three years of the OBR’s forecast period stretching out to 2029/30. As expected, the government chose the ‘smorgasbord’ approach to tax increases having stepped back from politically sensitive income tax increases. The biggest increase in tax revenues will come from the continued freezing of income tax thresholds. Overall, the tax burden will rise to the highest level on record at 38% by the end of this parliament.
- The UK government will shift away from the regular cycle of worries over bouncing off its fiscal headroom every six months by switching to an annual assessment of the state of the nations finances by the Office for Budget Responsibility (OBR) instead. The OBR will continue to provide economic forecasts every six months.
- Bloomberg reported that Kevin Hassett, chair of the US National Economic Council, will be appointed as Fed Chair by President Trump. Hassett, who has endorsed further rate cuts, is already seen as the most likely candidate in prediction markets and told Fox News he would accept the role if asked. Treasury Secretary Scott Bessent said there was a “very good chance” Trump could make the announcement before Christmas.
By the numbers – all eyes on the UK budget
- £21.7 billion – the government’s fiscal headroom will nearly double and whilst being higher than expected, stands below the average level of £28bn between 2010 and when Rachel Reeves became Chancellor.
- £304.2 billion – the level of Debt Management Office issuance to finance government borrowing over 2025-26. This was lower than expected and included a bias towards shorter term debt.
- 7 basis points – the fall in the UK 10-year government bond yield as markets breathed a collective sigh of relief that the Budget contained no nasty surprises. The 10-year yield fell to 4.42%.
- £11.3bn – the amount of spending increases, including £10billion of welfare spending. Much of this expenditure is front loaded, to be paid for later.
- £26 billion – the amount of tax increases, which comes on top of the £40bn increases announced last autumn. This was the third largest tax raising budget since 2010.
- £21.1 billion – the amount borrowing will rise by between 2026 to 2028.
- £26.1 billion – the amount borrowing will fall by in 2029-30 as tax increases take effect.
Market movers
Or actually, ‘not market movers’ which is probably just fine with the UK government. The process of managing expectations over the past couple of months – the Budget date was announced so long ago the schools were still on summer holidays – ensured that markets were prepped for bad news, which meant the Chancellor was able to surprise positively. We saw Gilt yields move slightly lower (seven basis points was actually the biggest drop on a Budget day for 19 years) while Sterling was little changed. UK equities saw the FTSE100 index mirroring the moves seen elsewhere in moving higher; the FTSE 250 index of more domestically focussed firms saw a bounce to make a small dent in recent underperformance.
Another metric that failed to move was the OBR’s forecast on growth – at least in respect of the impact on the UK economy of the measures announced. The OBR stated, “we have assessed that none of the policy measures in this Budget have a sufficiently material impact to justify adjusting our post-measures potential output forecast.” All the same, the OBR did increase their forecasts for economic growth for 2025 to 1.5% from their previous forecast of 1.0%. 2026 growth was downgraded to 1.4% from 1.9% with growth for 2027/28/29 trimmed to 1.5% per annum. The OBR also appeared a little sceptical on the higher-than-expected fiscal headroom announced, stating the figure appeared “small given the uncertainty in their forecast”.
The investment lens
The UK Budget feels a bit like an economic sticking plaster, with some fiscal issues kicked down the road and the size of the fiscal headroom bringing some comfort. The deficit is expected to shrink, but the level of debt as a proportion of GDP will remain elevated. Growth forecasts meanwhile, are uninspiring. A lot of the fiscal ‘pain’ in this Budget is deferred to the end of the forecast horizon in 2029/30. With the next election (probably) in 2029, this seems unlikely. Chancellor Reeves has navigated this budget as well as could be hoped. Markets are OK with it, the OBR was OK with it and the Labour backbenches are satisfied for now. That’s about as good as it was going to get.
However, the Budget shows little ambition to boost growth or investment for a government with a huge parliamentary majority and almost four years until the next election. After winning the election last year, the Chancellor said boosting economic growth would be a “national mission” for the government, but this looks more like a Budget designed for political survival than one to deliver economic growth. The Chancellor has arguably failed e to address supply side issues or meaningfully attempted to stimulate or incentivise work or investment.
This was a sensible Budget given the circumstances but lacks any significant policies if the government has any intention of getting anywhere near their stated aim of 2.5% growth. This may well be ‘mission accomplished’ in the short term but risks remain that ‘events’ erode the fiscal headroom once again. The Budget feels like a short-term fix that buys time for the government but leaves the longer-term issues for another day. Perhaps when the Prime Minister and Chancellor feel more comfortable in their positions we may see greater ambitions in their policymaking.
