Global Macro Research
PoliticsA tax and spend (and headroom) budget
The UK budget raises taxes, spending, and the headroom against the fiscal rules. Back-loaded tax increases mean the budget modestly supports growth in the near term, but this raises questions about fiscal credibility. The government is likely to remain under political pressure, and may not survive past the May elections.
Authors
Lizzy Galbraith
Senior Political Economist
Luke Bartholomew
Deputy Chief Economist
Paul Diggle
Chief Economist
Duration: 1 Min
Date: 26 Nov 2025
Key Takeaways
- The (prematurely released) OBR forecasts downgraded UK GDP growth. But higher inflation and wage forecasts mean the projected deterioration in the overall tax take wasn’t as bad as it could have been.
- This meant that – prior to the measures in the budget – the chancellor still had £4.2 billion of fiscal space.
- So, the budget was not about realigning fiscal policy to macro fundamentals but increasing taxes to make two political choices: doubling the headroom against the rules to £22 billion; and increasing spending.
- The budget increases taxes by £26 billion. This includes freezing income tax bands from 2028, and higher taxes on property, dividends, and savings.
- Spending increases included a £10 billion welfare reform package, the centrepiece of which was the lifting of the two-child benefit cap. Measures to reduce household energy bills, as well as freezing prescription costs and rail fares, were announced.
- The budget will reduce inflation modestly in the near term, reinforcing our expectations for Bank Rate to fall to 3% next year.
- After some volatility, the market reaction is sanguine. This reflects the lack of surprises and the increased headroom. However, the very backloaded revenue raising may be a source of future market concern.
- Indeed, the budget will not have done much to assuage growing concerns within the Labour Party over Starmer and Reeves' leadership. A poor May local election result could trigger a leadership contest.
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