What the Autumn Budget means for the UK economy

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Markets regained momentum last week, with global equities rebounding.

Sentiment was supported by renewed expectations of monetary easing in the U.S., as incoming data pointed to a softer economic backdrop.

While the overall market tone remains one of caution due to lingering concerns over high U.S. artificial intelligence (AI) stock valuations, investors cheered on improved rate cut expectations and signs of near-term fiscal clarity.

In the UK, all attention was on the Autumn Budget, which highlighted the government’s efforts to balance fiscal responsibility with the need to sustain near-term activity.

The Budget was broadly viewed as fiscally conservative. Chancellor Rachel Reeves announced a much larger fiscal headroom of £21.7 billion, a figure more than double the £9.9 billion previously projected. This headroom was achieved by a combination of more favourable forecasts from the Office for Budget Responsibility (OBR) and a sizeable package of tax rises.

Source: OBR Economic and fiscal outlook, November 2025

Markets interpreted this larger fiscal buffer as a signal of discipline, particularly at a time when gilt investors have been wary of potential policy slippage. Gilt yields fell modestly after the announcement, and the pound edged higher, reflecting a constructive reaction to the government’s strengthened capacity to meet fiscal rules.

Autumn Budget shows fiscal pain to be backloaded

It was well known that the chancellor would need to cut spending or raise taxes, as changes to the OBR’s growth forecasts meant she was no longer on track to meet her fiscal rules.

In response, she is increasing borrowing in the near term, while raising the tax burden later. In practical terms, this means ‘pain is backloaded.’ This will mainly be achieved through £26 billion in tax increases, three quarters of which won’t be implemented until April 2028.

Amongst the main measures announced were:

• Freezing income tax thresholds until April 2031, which will raise an estimated £8 billion in the 2029/30 tax year.
• Subjecting salary sacrificed pension contributions above £2,000 to both employer and employee National Insurance contributions from April 2029, which will raise an estimated £4.7 billion in the 2029/30 tax year.
• Increasing income tax rates on dividends, property, and savings by 2%, which will raise an estimated £2.1bn in the 2029/30 tax year.

On top of these revenues of almost £15 billion from personal tax increases, a further estimated £11 billion in revenue is to be achieved from a series of smaller measures.

While fiscal tightening is backloaded, spending measures were frontloaded, consisting mainly of £10 billion of welfare measures (including the expected removal of the two-child benefit limit).

Overall, the Budget remains modestly contractionary for growth across the forecast period. There’s frustration amongst businesses over the lack of a pro-growth spirit or constructive strategies to tackle dire productivity growth.

While the Budget isn’t expected to materially reshape the interest rate outlook, it also doesn’t stand in the way of the Bank of England (BoE) cutting rates in December. Against the mildly growth-supportive loosening of policy in the near term, the package announced also included measures which the OBR estimates will reduce Consumer Price Index (CPI) inflation by 0.5% in Q2 2026. This includes freezing rail fares, extending the fuel duty freeze, and an energy bills package that aims to reduce bills by an average of £150 per year from April 2026.  

Source: OBR Economic and fiscal outlook, November 2025

Encouragingly, the OBR’s inflation forecasts show CPI inflation at 2.4% in Q2 2026, an improvement to the BoE’s forecast of 2.9% year-on-year made in its November Monetary Policy Report. Financial markets continue to price in a high probability of a BoE rate cut in December, citing muted growth and moderating inflation trends.

Looking beyond the near term, longer-term fiscal challenges remain. The OBR now projects the UK tax-to-GDP (gross domestic product) ratio to reach a new all-time high of 38.3% in 2030-31, markedly above its projection in March.

While the chancellor’s efforts may offer short-term reassurance to investors, structurally higher tax burdens risk reducing incentives for both businesses and workers. That could weigh on investment decisions and growth trends over time, particularly if economic momentum weakens more than anticipated. If tax receipts fall short because of weaker growth, this may reignite concerns for higher taxes or increased borrowing in the future.

For detailed commentary on the Budget and its implications for personal finances, please refer to our accompanying insight article here.

Weak U.S. data fuels December rate cut bets

Turning to the U.S., recent economic data came in softer than expected across several fronts, reviving expectations of a December rate cut.

September retail sales increased by just 0.2% month-on-month, which was much lower than both experts’ anticipations and August’s figures. Weakness was seen in motor vehicle sales and discretionary categories.

November data from the Conference Board showed that consumer confidence saw its highest decline since April, with forward-looking measures falling to their lowest in over a year. Part of that could be related to the prolonged government shutdown, but it also revealed rising concerns around income security and the labour market. For instance, the share of consumers that expect their incomes to rise in the next six months fell to the lowest level since February 2023. The views on current and future business conditions deteriorated.

In addition, U.S. regional manufacturing surveys like the Richmond Fed Manufacturing Index pointed to further moderation in activity. Meanwhile, producer prices came in below expectations, which indicated that tariffs haven’t materially impacted factory gate prices.

The broad U.S. data tone suggests that the economy is still expanding, but at a slower pace, and that price pressures will continue to ease due to the cooling labour market.

The Federal Reserve (the Fed) won’t receive another employment report before its December meeting, and visibility on inflation will also be more limited than usual. Traders initially viewed a December pause as the most sensible course of action. But last week’s range of weaker-than-expected data changed that narrative. The market is now pricing in an over 80% chance of a December rate cut.

Coming up

• China Purchasing Managers Index and U.S. ISM Manufacturing Index: These private sector business surveys will provide a fresh look at the state of the world’s biggest economies.
• U.S. inflation: The September U.S. PCE (Personal Consumption Expenditures) Index, an inflation indicator closely watched by the Fed, is released ahead of the next Federal Open Market Committee meeting.
• Eurozone inflation: November’s CPI estimate is likely to show inflation remained stable at 2.1% year-on-year.

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