Photo by Jason Briscoe on Unsplash
 

Traders, investors, businesses, and individuals alike have been left to digest a raft of tax and spending measures announced largely by the OBR well ahead of the Chancellor’s appearance at the dispatch box. While Reeves put more flesh on the bone, providing much of the detail behind policies laid out in the OBR document, the market reaction had, in large part, already kicked off well before she officially began. In a budget widely viewed as a smorgasbord of measures, it is inevitably tricky to discern the overall implications for the economy, inflation, jobs, and the consumer.

Today’s tax hikes are forecast to raise £26.1bn by 2029/30, building on the £40bn raised back in October 2024. This time around it been led by the extension to the freeze on personal tax thresholds, alongside new charges and restrictions on salary sacrifice contributions. Coming off the back of a decision to limit cash ISA contributions in a bid to push funds towards investment, the move to disincentivise salary sacrifice could weaken the case for prudent financial planning and reduce pension fund flows into UK stocks.

From a broader perspective, the decision to more than double the fiscal headroom (from £9.9bn to £21.7bn) provides greater confidence that the government won’t be back in the same tight fiscal position next time around. This helped lower bond yields immediately after the OBR leak, although yields have since fluctuated, with the 10-year sitting above the session lows. Economically, the OBR projects that growth will be lower and inflation higher as a result of this budget. Notably, however, they forecast a -0.45% drop in UK CPI next year thanks to measures targeting rail fares and energy taxes. Though this is expected to reverse and push inflation higher from 2027 onwards.

The pound has reacted largely positively, with GBP outperforming all major currencies aside from the dollar today. Meanwhile, while UK-listed stocks initially pulled back following the OBR leak, both the FTSE 100 (+0.65%) and FTSE 250 (+0.80%) have moved higher throughout the budget announcement. Notably, it is the banks that are outperforming, with the likes of Barclays and Lloyds helping to drive the FTSE 100 higher. 

Ultimately, this has the feel of a “sell the rumour, buy the fact” event, with markets responding to a budget that doubles fiscal headroom and imposing measures that are perhaps less onerous than some had feared. And with many measures coming in play years down the line, the burden will be gradual rather than an immediate hit. For the economy, hopefully we will see a pickup in economic activity as we recover from a period that saw investment delayed and some taking drastic measures based on rumours rather than fact (eg. an exit tax on assets for those relocating abroad).

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