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The UK Chancellor appears to have escaped the Autumn Budget unscathed, at least initially.
This is despite a farcical pre-budget build-up, culminating in the leak of the OBR’s assessment of the outlook and the soon-to-be-announced measures roughly an hour before Rachel Reeves began speaking.
Yet we think the Chancellor should be thanking the OBR, even after this screw-up. Forecasts underpinning this budget, and governing the Chancellor’s fiscal rules, have ultimately proven very kind to Rachel Reeves, in contrast to pre-event speculation.
Most importantly, there was ultimately no black hole for the government to fill, in contrast to pre-announcement speculation. Indeed, this was true even after a widely expected downgrade to productivity growth estimates of 0.3pp, bringing the OBR in line with other economic forecasters. This lowers growth from 2026 onward, with the OBR now expecting real GDP to grow around 1.5% each year through to 2030, roughly 0.3pp lower than in March.
But an upward revision of prior estimates, and to growth in 2025, leaves the level of real GDP in 2029 little changed from the OBR’s March forecast.
More surprising was an upgrade to the OBR’s inflation forecasts. While faster price growth pushes up some areas of government spending, such as on pensions and benefits, it has also resulted in the OBR uprating wage growth projections as well. With the Chancellor having already frozen tax thresholds for the next few years in nominal terms, higher wage growth translates into an increased tax take, exacerbated by a shift in favour of labour income in this latest forecast iteration. Accounting for this, then pre-measures, the Chancellor would have met her fiscal rules by roughly £4bn in 2029/30.
Not that this stopped the Chancellor from raising taxes anyway. Policy U-turns since March, combined with additional spending commitments such as scrapping the two-child benefit cap, served to more than eliminate any remaining headroom. To offset this, the Chancellor will raise taxes by roughly £26bn in 2029/30, including via a further freeze in tax thresholds, according to the OBR’s latest numbers. The result is a £21.7bn current budget surplus in 2029/30, more than double the £9.9bn headroom projected in March.
It is notable to us that much of the fiscal consolidation implied by this greater headroom is delayed until the back end of the forecast period.
This means less of a negative growth impact up front, but much more painful tightening later down the line. It also implies greater borrowing over the period in between. In short, the Chancellor will increase borrowing to pay for higher benefits spending up front, with a promise of higher taxes in the future. That is not a mix that we think markets will ultimately view favourably, despite Reeves seeming success in disguising these key details for now.
Indeed, as the smoke clears, we expect markets to treat this budget with increasing suspicion for two main reasons.
First, we are doubtful of the claim that taxes will rise sharply immediately ahead of an election. More likely, the Chancellor will continue to defer the pain, albeit at the cost of extra borrowing. Second, we think the OBR is too overoptimistic when it comes to the short-term fortunes of the UK economy, seeing downside risks to OBR forecasts of both inflation and GDP. Thus, we are sceptical of the initial market reaction to today’s events, which has seen the pound nudging higher on an initial relief rally.
As traders dig through the details, we think many will reach a similar conclusion to us, leaving sterling risks skewed toward a reversal lower over the coming days.
Author:
Nick Rees, Head of Macro Research