Sorry, no search results could be found.
27 Nov 2025 | 6 minutes to read
When Chancellor Rachel Reeves delivered her 2024 Autumn Budget it was intended to be a ‘one and done’ type of event. A big Budget to clear the decks. The significant tax hikes and increase in public borrowing announced then were explicitly not things she intended to repeat. However, the Chancellor’s “iron clad” commitment to her self-imposed fiscal rules, and the wafer-thin ‘headroom’ she has engineered to protect them, meant she was always likely to remain at the mercy of economic conditions and the markets.
There were 85 days between 3 September when the Autumn Budget was announced and when Reeves eventually delivered it. That left plenty of time for speculation to build as it became increasingly clear that further tax rises were on the agenda. In the interim, leading economic indicators suggested that private sector activity slowed sharply in November, as businesses put plans on hold ahead of the Chancellor’s statement – clearly unhelpful for growth. Ironically, given the long wait for the Budget, the Office for Budget Responsibility (OBR) rather farcically released its detail early in error before Reeves had even got to her feet at the dispatch box. No white rabbits from a hat here.
The Budget was essentially a delicate balancing act for the Chancellor:
To recap, the Chancellor’s fiscal rules are twofold: to not borrow to fund day-to-day public spending (i.e. spending is covered by tax receipts), and to have debt as a share of UK GDP falling by the end of the current parliament in 2029-30. However, as we have noted in the past, these promises are based on assumptions and forecasts in the OBR’s periodic reports and dependent on both growth materialising at a certain level and tax receipts being fully realised – variables which the Chancellor does not control.
On this occasion, however, the OBR’s latest update to its forecasts did not hand Reeves with quite the fiscal repair job many had feared. Forecast GDP growth for this year rose to 1.5%, up from the previous estimate of 1%, but growth is now expected to be lower in every other year of the forecast period to 2030. The downgrade in growth was a result of the OBR lowering its expectations for the UK's productivity by 0.3% - revising the trend rate of productivity down from 1.3% to 1%.
The productivity downgrade has a direct effect on GDP forecasts. Ultimately, lower levels of economic activity mean smaller flows into Treasury coffers, and a reduced ability to meet spending commitments and remain within the parameters of the fiscal rules. However, cumulative real wage growth and inflation over the next two years are now forecast to be around 0.75% and 0.5% higher respectively than in March, which has the effect of supporting forecast tax receipts.
The upshot was that the OBR still anticipated the Chancellor having £4bn of fiscal headroom in 2029-30, even before accounting for any policy changes since the spring or the revenue raising measures contained within the Budget. This is lower than the £9.9bn level Reeves had restored her headroom to at the March Spring Statement, but around £14bn higher than most observers had expected.
The tax hikes announced this Autumn – though not as significant as a year ago – still totalled a substantial £26bn. But they are bitty: 88 measures in all. In part, these measures were to increase fiscal headroom closer to £22bn.This is near to pre-pandemic levels of around £30bn. While this will reduce the chances of the Chancellor’s hand being forced at future Budgets, were economic turbulence to ratchet up it is still not especially generous.
The Chancellor also needed tax rises to pay for additional spending – in no small part to keep enough Labour MPs on-side (despite the significant majority secured at the general election). Universal credit spending will increase as a result of the scrapping of the two-child limit, while U-turns on previously-announced welfare reforms also have to be factored in.
Despite much prior speculation that the Reeves would break a manifesto pledge by increasing income tax, the Treasury backed away from such a ‘big bazooka’ type measure, seemingly when it became clear that the OBR’s forecast would paint a more favourable picture than feared. While income tax hikes are unpopular with voters, they would likely placate bond markets by demonstrating an unmistakably strong commitment to fiscal prudence. Higher income taxes tend to raise the expected / required revenue successfully given they are difficult to avoid by changing behaviour. They can also deliver a more-or-less immediate disinflationary impulse to an economy, perhaps paving the way for lower interest rates to come through sooner. The same would not be true of employer national insurance or VAT increases, which would be inflationary.
As it was, the Chancellor brought together a broad range of tax increases without raising the main rates of income tax, National Insurance, or VAT. The most significant of these was a freeze in income tax thresholds for a further three-years to 2031, at which point they will have been frozen for a decade, with an ever-increasing number of taxpayers dragged into higher income tax brackets through the process of fiscal drag. A range of other tax increases – on pension contributions through salary sacrifice schemes, dividend and property income, business investments and capital gains were also announced – many of which could be framed as reducing incentives to save and invest, and at odds with the Chancellor’s stated desire to boost economic growth. Additionally, changes to the taxation of electric vehicles, and a council tax bolt-on for high-value homes were also tabled.
A key point is that these tax rises are slated for the future, with many not coming into effect until towards the end of the current parliament, while the spending increases – including those outside direct government control – are coming somewhat sooner. This introduces an element of risk: borrowing will rise near-term with the intention that it is offset further down the line by higher taxes kicking in. The fiscal consolidation is therefore heavily backloaded - spend now, pay later. This may eventually give Reeves the “white rabbit from a hat" moment the OBR’s leak denied her: it will be in her gift to not follow through with some tax rises, and gain political capital, if things look rosier towards the next general election. On the flip side, there is the risk that the government does not remain steadfastly committed to fiscal discipline if a sufficiently rosy outlook has not materialised by the time the next general election looms.
The UK’s elevated debt level makes borrowing costs fundamental to the leeway the Treasury have to work with at each fiscal event. Borrowing is set to be higher than previously forecast in the current financial year and each of the following three, before falling below the previous forecast in 2029-30. Despite the Chancellor’s fiscal consolidation, total borrowing is expected to be £57bn more over the five years to 2029-30 than expected in March.
The OBR forecasts that debt interest spending will rise in every year of their forecast period. Compared to March, it is set to be £5bn a year higher in 2029-30, reflecting stronger inflation in the short-term and interest rates remaining higher-for-longer than anticipated on a rising stock of debt in the medium-term.
The rate of inflation has a material impact on the level of debt servicing costs: all things equal, higher inflation means higher interest rates for longer, also impacting the cost of index-linked bonds. The OBR confirmed its expectation that inflation would hit 2% from 2027, later than forecast in March. And noted that higher and more persistent inflation reflects stronger momentum in services price inflation and higher wage growth. Policy measures announced since March are expected to knock 0.3% off inflation in 2026, primarily reflecting the impact of measures to reduce household energy bills and another fuel duty freeze extension. After which measures announced in the Budget are expected to be inflationary, such as the per-mile taxation of electric vehicles from April 2028. The OBR also noted that there is uncertainty around its inflation outlook both due to domestic and international factors. Doubts remain around how far domestic wage growth will moderate in the coming year, while ongoing geopolitical developments could increase energy prices, and uncertainty over global trade policy remains a risk for import prices.
The Budget seems unlikely to give the Bank of England too much pause for thought, with upside risks to inflation potentially shifting monetary policy considerations in a more hawkish direction at the margin, but the direction of travel still one of gradual monetary easing.
Reeves had a difficult juggling act in this Budget, sometimes self-inflicted, through persistent speculation and leaks. Investors had for weeks been questioning the credibility of government borrowing under Labour, and individuals and business fretted about potential tax rises.
Ultimately the bond markets will judge the credibility of the Chancellor’s package of fiscal consolidation measures. The promises made need to be delivered on. The initial response from an economic perspective is that Reeves appears to have becalmed bond markets, with government borrowing costs settling near pre-Budget levels – for now. Sterling also strengthened a little against the dollar. She may have also largely appeased those more left-wing Labour MPs advocating for yet more generous welfare reform. But it remains to be seen whether this Budget will promote enough growth and rekindle sufficient confidence for individuals and investors alike.
Genuine pro-growth measures were conspicuously absent, with a three-year stamp duty holiday on shares for newly-listed UK companies a welcome but rather isolated measure. The OBR has given Reeves’s fiscal mandate a 59% chance of succeeding. Fiscal wriggle-room of £22bn is still not that high by historical standards. There is margin for error.
Beyond our shores, the geopolitical jigsaw is complicated. The contours of this new reality – and its costs – are forming but the picture is not yet totally clear. Labour’s ability to deliver a faster-growing and more productive economy will be challenged to a degree by factors beyond its control, including US tariffs, war on Europe’s eastern flank, unfavourable demographics and an expensive transition to net zero.
More imminently, after a bruising period Reeves and Prime Minister Starmer will hope their political careers outlive the OBR’s near-term forecasts. After a heavily over-briefed Budget ultimately preferring a grab-bag of smaller tax rises to a big bazooka, they will both now hope for a period of relative calm.
Important information
The information contained in this document is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, TrinityBridge accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.
Before you invest, make sure you feel comfortable with the level of risk you take. Investments aim to grow your money, but they might lose it too.