Key points:

• UK Chancellor of the Exchequer, Rachel Reeves, delivered a highly anticipated Autumn Budget on Wednesday 26 November against a backdrop of intense public and market scrutiny. 
• The announcement included £26bn in tax rises by 2029-30, offsetting £11.3bn in extra spending.
• The gilt market reacted cautiously, with the larger-than-expected fiscal headroom reassuring investors. 
• We believe the announcement provides little incentive for the Bank of England (BoE) to speed up interest rate cuts in the near term. 

Context
 

Going into this Budget, expectations were high for significant tax rises to address fiscal imbalances, as investors remain alert to volatility in UK assets. 

The UK faces a challenging mix: elevated interest rates, high public debt ratios, and persistent budget deficits – among the worst in the advanced world. 

Crucially, these fiscal strains have emerged at or near full employment. This matters because there is likely no cyclical upswing in tax revenues to repair public finances. 

As such, the UK government must rely on structural fiscal tightening.
 

Key announcements
 

• Tax rises: £26bn by 2029-30, offsetting £11.3bn in extra spending.
  
  
• Fiscal headroom: Doubled to £21.7bn (versus £15bn consensus and £9.9bn prior).
  
  
• Tax burden: To hit 38% of gross domestic product (GDP) by the end of parliament, the highest since the Second World War, and up from 35% of GDP in 2024-25.
  
  
• Measures: The largest revenue-raising measures included: 
  • Freezing income tax and National Insurance Contributions (NICs) thresholds to 2030-31. 
  • NICs on salary-sacrificed pensions.
  • A 2-percentage point increase on taxes on dividends, property, and savings income.
     
• Timing: Tax increases will begin in 2027/28 and gradually intensify over the forecast horizon. Despite earlier market expectations for an upfront income tax hike from April 2026 to secure immediate revenues, the Chancellor opted for a backloaded fiscal tightening. Combined with a broad array of measures that add complexity to the UK tax code, the Budget highlights the government’s difficult balancing act – managing politically sensitive choices while signalling fiscal credibility to investors.
   

Our view
 

The gilt market response has been cautious – and rightly so, in our view. The larger-than-expected fiscal headroom reassured investors, reducing near-term fears of fiscal slippage. 

However, the backloaded nature of tax hikes and recent welfare U-turns keep attention on UK fiscal and political dynamics elevated. Specifically, the announcement implies higher near-term borrowing in 2026/27 before borrowing is reduced in 2029/30.

Measures aimed at energy prices and fuel duty will deliver downward pressure on inflation by early 2026, though this effect is expected to unwind by 2027. 

Given the sequencing of fiscal measures, there may be a near-term fiscal stimulus that slightly lifts growth next year before announced policies become a drag on activity. 

In terms of UK monetary policy, we think the fiscal announcement provides little incentive for the Bank of England to cut policy rates faster than expected in the near term. If anything, the 4.1% minimum wage hike confirmed in the Budget – starting from April 2026 – adds an offsetting source of underlying inflation pressure.

Our view is that the Bank of England will cut interest rates cautiously in 2026, from 4.00% now to 3.5% next year.

2881459 Exp: 29 May 2026