Kicking the can down the road!

Wednesday 3rd December 2025

Please click here to read our budget briefing. We have kept it short given all the publicity and commentary, not least the fallout from the Office for Budget Responsibility (OBR) chairman resigning after leaking the Budget early and whether the public have been misled. The stories will no doubt continue to rumble on.

Ironically, Budget Day was a double whammy for us as we spent the morning going through our business budget for next year with our accountant to be followed by Rachel Reeves budget for the UK. Of course there were two main differences:

• We look at our costs and assess where we get value and hence where we can reduce or realign them.
• We’re conservative, so not trying to balance the books tinkering with the future.

It’s the second point that struck us so much in Rachel Reeves latest budget. There wasn’t that much to have an immediate impact, that was done at last year’s budget which put up taxes on employing people and on those with savings and investments. As a result, more people left the UK over the last year to seek a job or set up a business in a lower tax jurisdiction, or to take their current wealth to somewhere where they will keep more of it. Dubai, Italy and the US have been attractive places for people both with talent and with wealth. This budget mainly aims for more Income tax revenue in the later years of their forecast from continuing to freeze the tax thresholds. This means:

• 780,000 more people will have to pay 20% tax,
• 920,000 more people will be pushed into the 40% tax band,
• 4,000 more into the highest 45% band.

This stealth tax approach i.e. the future tax revenue impact by not raising allowances and indeed the salary sacrifice restriction to £2,000 not taking effect until 2029 allowed her to build in extra capacity in balancing the books. In some ways it’s a clever tactical move as buys them time and this is the crunch – Reeves and Starmer now must deliver the growth needed that will boost the UK and hence government revenue - the plan, we guess, being so they can then magnanimously reduce this future tax burden just in time for the election!!

We personally hope they achieve this as it means the UK is back achieving the innovation and growth that we are capable off and it is that growth we have been promised that seems to be the illusion, which needs real drive and change. We leave it to your own judgement whether it will be achieved and comment more below.

Economic Reaction

Government bonds (Gilts) reacted positively - Gilt prices ticked up and the yield (interest rate) on the 10-year UK Government bond fell slightly after the announcement. Sterling also strengthened. In the Budget, Reeves recommitted to the government’s fiscal rules. She explained that freezing income tax thresholds—together with other tax measures—will increase fiscal headroom from £9.9bn to £21.7bn. This headroom represents how much the government can spend or cut taxes without breaking its own rules. As we have already indicated most of this improvement came from higher taxes, as spending cuts seemed non-existent.

What This Means for Interest Rates

Cutting energy bills from April should help reduce inflation in 2026 by around 0.4%. This gives the Bank of England (BoE) more room to cut interest rates sooner. Inflation has already been easing, with services inflation—often a sticky component—falling in October. This strengthens the case for another interest rate cut in December. Markets currently expect interest rates to fall to around 3.3% by late 2026, but the economic slowdown could mean even larger cuts.

Why?

The OBR sets out forecasts for the economy that determine how much the Chancellor needs to raise in taxes to keep the excess borrowing over income under some control. They have downgraded their forecast of future productivity growth after years of overestimating it. The UK economy has slowed materially since the first quarter of this year – with a reduction in private sector activity driven by weaker business investment, subdued consumption growth and rising unemployment. This has been depressing wage growth and given the weaker economic backdrop, this means that the Bank of England could deliver more interest rate cuts than currently expected by markets.

Political Considerations

The Budget appears to have smoothed tensions within Labour - for now. But with local elections in May, political risks remain, and with the current budget backlash and appalling way the run up to the budget was handled, any renewed uncertainty could unsettle markets.

Looking Ahead

In summary, Rachel Reeves’ Budget has been carefully crafted to balance fiscal responsibility with political caution. While much of its impact will be felt in the future rather than immediately, the market reaction shows a level of confidence in the Chancellor’s approach. Bonds have responded positively, inflationary pressures are easing, and there is room for potential interest rate cuts—all of which are encouraging signs for investors.

That said, risks remain. Slower economic growth, political uncertainties, and the challenge of delivering the growth needed to fund the Budget’s ambitions are real factors to watch. Are this government brave and good enough to make the changes that will unlock the potential growth?

On a more positive note, the global economic backdrop provides reason for optimism. Growth continues worldwide, interest rates are beginning to ease, and companies are expected to see improved earnings in the coming years. For investors, maintaining a focus on the broader global picture, rather than short-term headlines, will be critical.

Ultimately, while the Budget may not dramatically change the landscape today, it sets the framework for future growth and fiscal stability - assuming the promised outcomes are delivered! Keeping a balanced, long-term perspective remains as important as ever.

Let us finish on a quote by the famous economist John Maynard Keynes:
The avoidance of taxes is the only intellectual pursuit that still carries any reward.