UK budget: Front and back-loaded measures

Following months of speculation, pre-Budget U-turns – as well as the OBR’s premature publication of their forecasts – UK Chancellor Rachel Reeves claimed the spotlight in the House of Commons yesterday and delivered her Autumn Budget.

Given the lack of upcoming event risk today, and with US markets closed in observance of Thanksgiving, I want to dedicate this post to the key themes from the Budget and touch on its implications for the economy and UK assets.

I may rile some people with this comment, but I do not understand how the Budget breaks the UK’s cycle of fiscal problems. Unless I missed something, back-loaded tax rises and front-loaded spending are not going to solve things. Put simply, the government plans to increase spending in the near term and pay for it in future years through tax rises. As I am sure you will acknowledge, this will increase government borrowing in the short term.

Better-than-expected fiscal headroom

Reeves secured a larger fiscal buffer, rising from £22 billion in 2029/30 to £9.9 billion in March's Spring Statement. You can think of a fiscal buffer as a ‘safety cushion’ for the government; imagine you earn £1,000 a week and your bills are £500, then your ‘buffer’ would be £500.

While £22 billion is a lot of money, the UK has, on average, operated with greater fiscal headroom. Consequently, while by no means a small buffer, it is not generous. Furthermore, the £22 billion comes with conditions that may not hold up; the back-loaded tax increases mentioned may not even materialise.

Despite the OBR’s early release of its forecasts, the ‘good’ news is that it revealed the UK would perform worse than expected, but only by £6 billion – far better than the £15 billion projected by many analysts. Even though they predicted slower productivity growth, short-term higher inflation and wages helped balance things out. What this essentially means is that the government has more ‘wiggle room’ and greater financial flexibility, making additional tax increases less necessary right now.

Growth is now projected at 1.5% in 2025 (upgraded from 1.0%), but just 1.4% in 2026 (downgraded from 1.9%). Average growth over the forecast period is 1.5%, 0.3 percentage points slower than the Spring projections.

The nearly £30 billion in tax rises threatens to dampen consumption, whilst business and consumer confidence look set to take yet another battering. There is precious little in this Budget to stimulate growth, encourage business investment, or boost employment, raising the risk that Reeves, or her successor, returns for another round of tax increases next autumn as the economy slides further into a fiscal ‘doom loop’.

Back-loaded gamble?

The Budget revealed £26 billion in annual tax rises by 2029/30, equivalent to 0.75% of GDP, and pushing the overall tax burden to a record 38.0% of GDP by Parliament's end. However, none of this tax revenue will materialise next year.

Some of the key tax increases include extending the freeze on the personal income tax threshold until April 2031. With pay increases, this is estimated to pull more people into higher tax brackets and to raise around £8 billion in additional revenue.

Additionally, employee pension contributions will be capped at £2,000 before National Insurance Contributions apply, which is estimated to generate nearly £5 billion in revenue. Increasing interest rates on dividends, savings and property income by 2.0% is also expected to bring in another £2 billion.

So, while we have back-loaded tax increases, the rise in spending is front-loaded, which, as I noted above, is concerning. According to the report, spending is projected to rise by around £10 billion by 2029/30. By and large, this is driven by welfare spending and scrapping the two-child benefit cap.

BoE expected to cut rates next month

The National Living Wage increase of 4.1% – and a staggering 8.5% for 18-20 year-olds – appears particularly ill-judged, given that youth unemployment already exceeds 15.0%. Younger workers risk being priced entirely out of the labour market as businesses grapple with mounting cost burdens, creating further labour market slack.

These wage increases carry inevitable inflationary consequences. Businesses will pass at least some of the costs on to consumers through higher prices, potentially derailing any disinflationary progress. The OBR now forecasts inflation at 3.5% in 2025 (above the 3.2% Spring projection), and 2.5% in 2026 (versus 2.1% previously).

The BoE’s previous projection that inflation would fall below 2.0% by Q2 27 suddenly appears optimistic, though recent inflation and wage data hint that concerns about elevated inflation expectations may be overblown.

Ultimately, this Budget has done little to derail expectations of a BoE rate cut next month, with markets pricing in 23 bps of easing – essentially a 90.0% probability. A more aggressive approach to fiscal tightening in 2026 would have argued for a faster pace of easing. Still, the back-loaded nature of the Budget means near-term contractionary effects remain limited.

The FTSE 100 and the FTSE 250 indexes rallied about 0.6% yesterday, extending Tuesday’s 1.0% gain. As for the GBP, the currency ended the session higher by around 0.5% versus the USD and by 0.3% against the euro. For now, the immediate risks to GBP and Gilts remain contained.