Rachel Reeves’ second Budget touched down with a noticeably bumpy landing this Wednesday. After weeks of leaks — some looking suspiciously official, others clearly not — the Chancellor’s options for filling the widening hole in the UK’s public finances and building enough headroom to avoid returning to taxpayers had been well-trailed. Expectations were high, and so was the scrutiny.
On first reading, the headlines seem encouraging: a smaller borrowing shortfall (£13bn vs £20bn) and fiscal headroom more than doubling from £9.9bn to £21.7bn in 2029–30. The problem is that, as that final number hints, almost all of the improvements are heavily backloaded.
Much of the fiscal consolidation only arrives from 2028/29 onwards, with borrowing falling meaningfully only in 2029/30. That leaves the longer-term plan vulnerable — both in terms of credibility and deliverability — especially when the adjustment is scheduled so close to a general election, and at a time when the government’s polling remains weak. As last year, these projections also hinge on the Office for Budget Responsibility’s (OBR) longer-run economic assumptions, which could easily shift again given the volatile geopolitical backdrop.
Impact of decisions from Autumn Budget 2024 onwards on households in 2028-29, as a percentage of net income, by income decile
In recent commentary we highlighted the risk of political pushback, not only from markets but also from within the Parliamentary Labour Party, particularly around spending cuts. In the end, nothing in the announced measures appears contentious enough to trigger a significant backbench revolt. Tighter rules on the government’s mobility scheme — widely viewed as too generous — are broadly balanced by the introduction of a mansion tax on properties over £2 million and new caps on salary-sacrifice pension contributions, while the removal of the two child benefit cap and package of measures to help with energy bills looks like it will be enough to calm errant Labour MPs.
Government policy changes are estimated to shave around 0.3% off UK CPI in 2026, but leave medium-term inflation expectations broadly unchanged. As a result, the Bank of England is unlikely to find additional room to cut rates beyond what it was already considering prior to the budget.
Markets have taken the announcement in reasonably good spirits, with long Gilts rallying in particular after the Debt Management Office (DMO) reduced long-dated issuance and cancelled several planned auctions. Ultimately, the budget does little to change the medium-term outlook for growth or inflation, but it does remove a lingering source of uncertainty that had been weighing on sentiment. Both markets and politicians seem to have breathed a collective sigh of relief. For the Bank of England, the Budget is unlikely to materially shift the policy path, but the reduced uncertainty should allow a clearer focus on the UK’s weak growth profile rather than anxiety over the inflation trajectory.
Perhaps the most striking feature of Budget Day is the sheer degree of wealth redistribution implied over the coming years — neatly illustrated in the chart below (capturing both Reeves’ budgets). This is, after all, a Labour government, and recent wealth trends have moved firmly in the opposite direction. If you were Rachel Reeves or Keir Starmer, this is exactly the chart you would want every wavering voter to see. One suspects there aren’t many Labour voters in that top decile.
The value of active minds: independent thinking
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