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Weekly Perspectives: Can we now move on from the UK budget?

Anthony Willis

Senior Economist, Multi-Asset Solutions team

Key Takeaways

After a protracted period of speculation the UK budget was finally delivered. Although it served to calm markets and create additional fiscal headroom, the announced policy measures don’t appear to particularly set the pulse racing.
Although Labour campaigned on a proposal for growth of more than 2.5% annually, the Office for Budget Responsibility is forecasting growth of just 1.5% for 2026 and beyond, with nothing in the budget that will seemingly incentivise growth and further innovation or employment.
The “spend now, pay later” structure could see taxes rise just as the next general election rolls round, which will be a headache for Labour, but the only way to avoid those tax rises is for greater economic growth to feed into higher tax receipts.
At the very least we now have certainty, and perhaps the foundations for more ambition in terms of policy making; indeed, from a political and financial markets point of view this is a budget that has bought the government some time. So let’s turn the focus to other things: first up, a December rate cut?

Transcript

Chancellor Rachel Reeves achieved her budgetary goals: – the OBR is happy, markets are calm, and Labour backbenchers are content. But is that good enough?

This week we’re talking about last week’s UK budget, the consequences and whether we can now move on to think about the remainder of the year. I would describe the budget as a a sticking plaster, very much in the style of “spend now, pay later”.

Chancellor Rachel Reeves achieved her goals: the Office for Budget Responsibility (OBR) is happy, markets are calm and the Labour backbenchers are content. What was positive from the point of view of financial markets is that the fiscal headroom is bigger than expected, which offersa buffer against future events. The OBR subsequently downgraded productivity, as expected: it upgraded growth for 2025 but downgraded it for 2026 and beyond (2027/28/29). In addition, the policy measures announced were assessed by the OBR as being neutral – neither beneficial nor detrimental to economic growth going forwards, but is that good enough? We’d argue no.

When we look back to the 2024 election, what became the Labour government was campaigning on a proposal for a growth target of 2.5% percent or more, and Reeves reiterated that target in last year’s budget. However, looking forward the OBR is forecasting growth beyond 2026 of just 1.5%, which is disappointing. There is nothing in the budget to incentivise growth, further innovation or indeed employment, and there is very little ambition from a government given that (in theory) has almost four years left in office and a huge parliamentary majority. This should allow them to be a little bit more ambitious in terms of policy making.

The budget itself saw spending increases front-loaded, with the cost of those policies backloaded – so the tax burden ramps up to 38% of GDP (an all-time high) at the end of the forecast horizon, ie 2029-30. Of course, 2029 is likely to be an election year, so that seems quite unrealistic. To avoid those tax rises there will need to be more economic growth to feed into higher tax receipts, but there was nothing in this budget to really suggest stronger growth is going to happen.In terms of the numbers, the government is going to spend an additional £21 billion over the next couple of financial years, and by the end of the forecast horizon we will see £26 billion of tax increases (on top of the £40 billion of tax increases we saw last year).

This budget does buy the government some time, both politically and from a financial markets point of view, so we can put it behind us . It is also positive that it will defuse a very extended period of speculation around the event – the budget date was announced in early September when our children were still on summer holidays; we’re now at the point where Christmas trees are going up, so it’s been a very long 12 weeks of speculation. At least we now know the outcome, and that certainty is a positive.

Looking forward, we can now focus on other things. On 18 December we have the Bank of England’s next base rate meeting, and I don’t think there was anything in the budget that has shifted our expectations of a cut to interest rates. Before that on 10 December the US Federal Reserve (Fed) meets. US market expectations have been on a round trip. We’ve seen a little more volatility recently, firstly thanks to expectations that the Fed won’t cut rates, and now there are higher expectations of a 25-basis point rate cut.

Overall, the budget was a helpful event in terms of clearing up some uncertainty. However, I don’t think it really solves a lot of the UK’s structural problems.

1 December 2025

2025年 December 01日

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Weekly Perspectives: Can we now move on from the UK budget?

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