UK Budget: Macro Bytes immediate reaction episode

No ‘black hole’—but higher taxes anyway. Despite fears of a big gap in the UK’s public finances, the official forecasts show the situation isn’t as dire as expected. Still, Reeves chose to raise taxes, especially on middle and high earners, and to freeze personal tax thresholds for longer.

A bigger buffer for the future. The budget more than doubles the government’s ‘headroom’—the financial cushion it keeps to stay within its own rules. This could help reassure financial markets and give the government more flexibility ahead of the next election.

Spending rises, especially on welfare. The budget includes a significant boost to welfare spending, including scrapping the two-child benefit cap, and measures to help with energy bills and other everyday costs in an effort to lower inflation.

Tax hikes delayed. Most of the new taxes won’t kick in until 2028, raising questions about whether they will ever be fully implemented, and whether the government’s sums will add up in the long run.

Political and market implications. The budget went down well with financial markets, which appreciated the increased fiscal headroom. But the UK government remains very unpopular, raising medium term questions about the sustainability of the current Labour leadership.