The UK Budget was bad in every way possible.
One word describes this Budget: bad, but it can be used three times, bad, bad, bad. Bad in terms of its fiscal consequences, economic impact and the incentives it embeds.
Because so much of the Budget was trailed in advance, the initial impact of it may be seen as neutral. It’s not. The Red Book confirmed that Britain is a high public spending, high tax and high borrowing economy—and with no appetite ever to reform.
The Budget provided a decisive shift away from a focus on economic growth to redistribution as a driver of fiscal policy. Tax hikes, not trimming public spending. Hitting work, not incentivising it. And saddling businesses with higher costs. The unintended consequences of the Chancellor’s 88 fiscal measures will be hard to quantify, but is unlikely to be economically beneficial.
First, the fiscal numbers remain in poor shape. Yet despite the pre-Budget speculation, the fiscal gap was not as bad as we had been led to believe, largely because higher inflation had fed higher tax revenues. This suggests that people and firms had been misled in recent months, which did not help confidence.
There is a veneer of stability, in that markets were relieved by the increase in the fiscal headroom from £9.9 billion to £22 billion. This is the buffer for the Chancellor to meet her main fiscal rule, reducing the possibility of Groundhog Day next year. The Office for Budget Responsibility (OBR) says there is a 59% future possibility of now meeting her self-imposed fiscal rules.
Despite this, the direction of travel for the fiscal numbers is poor. The OBR laid it bare. To stabilise debt, the Government needs to run a primary surplus (which excludes interest payments) of £47bn per year on average over the next five years. Instead, it currently has a primary deficit this fiscal year of £46bn. This is, “£100bn away from its debt-stabilising level.”
Public spending is not under control and will rise more than previously planned in every year of the forecast. So much so that, contrary to expectations, the Budget will provide a fiscal stimulus in the next three years: £4.1bn (2025/26), £9.3bn (2026/27) and £7.1bn (2027/28). Then, from 2028/29 onwards, the contractionary impact of today’s Budget measures will hit, as higher taxes bite. Taxes are expected to fall by £1.9bn in 2026/27, then rise by £2.9bn (2027/28), £10.7bn (2028/29), £23.2bn (2029/30) and a whopping £26.6bn in 2030/31.
In her speech, the Chancellor proclaimed that borrowing would likely fall sharply. I doubt it. The medium-term reduction in borrowing has already been shifted back a year in today’s Budget forecasts. Rachel Reeves expects borrowing to fall sharply at the end of the decade. It won’t. This has often been referred to as an Augustinian approach, of make me chaste but not just yet. Expect even more spending ahead of the next election. Debt will remain high.
Second, in terms of the economy, there was little in this Budget to boost growth. The OBR cut its growth projections, as it lowered its productivity forecasts as expected, but raised its near-term inflation forecasts too. This is not a good mix. Inflation is now expected by the OBR to be 0.5% higher but is still trending down. Growth is expected to average 1.5% over the next three years. This forecast of modest growth is achievable but may still prove optimistic. The OBR expects future hourly earnings to grow more slowly than productivity as firms will need to “rebuild their squeezed rate of return on capital.” There are pressures across the economy.
Third, the incentives within the Budget are not good for the economy. Work is not rewarded. Taxes are rising, including income tax thresholds. This stealth tax was put in place under the Conservatives, pulling more people into higher tax brackets through fiscal drag. By 2030/31 the overall impact of freezing allowances will have been £67 billion, of which £13 billion is due to the freeze announced today. Today’s freezing of allowances will drag 780,000 more into paying basic rate, 920,000 into higher rate and 4,000 additional rate. Pensions are also being hit by a tax change to salary sacrifice.
Welfare spending is not controlled. Total welfare spending was £314.7bn in 2024/25, rising to £389.4bn in 2029/30, £16bn higher than expected as recently as March. But it could be higher.
The OBR allocated a “very high” or “high” degree of uncertainty to 13 of the Budget measures, reflecting the uncertainty in behavioural response. Small taxes often grow and have negative and unintended consequences. The Treasury has always argued in favour of taxes where there is a clearly identified income stream, making them easier to collect and harder to avoid. The danger is that today we now start to deviate from this, as reflected in the “Mansion Tax.” The UK taxes housing more than any other than country but does it badly, with high stamp duty that deters turnover. Stamp duty remains high, and now there is a disincentive through a mansion tax to renovate or improve properties. A significant number of tradesmen work on upgrading properties, so such taxes could hit a wider group of people than advocates expect.
Overall, the UK will remain a low productivity and modest growth economy, and living standards will continue to stagnate.