The UK’s Autumn Budget is out after a chaotic early release – and for investors, the news is not entirely welcome.
Gilt yields initially fell as initial leaked headlines of the Office for Budget Responsibility’s assessment of the Treasury’s plan began to emerge. The level of headroom – the margin for error surrounding the government’s main fiscal rule to balance day-to-day spending with tax revenues by 2029 – has increased to £22bn, from £9bn in the spring.
But beneath the surface, the story is more nuanced.
For all the talk of a significant fiscal hole over recent weeks, the OBR’s economic forecast revisions only shaved £6bn off the government’s headroom. A well-flagged 0.3pp per year cut in the UK’s productivity growth was heavily offset by near-term upgrades to inflation/wage growth. We’d expected the shortfall from economic downgrades to total at least £15bn.
So a smaller fiscal hole, which means the degree of fiscal consolidation required was more modest, too. While tax hikes add up to an additional £26bn/year in revenue by 2029/30 – 0.75% of GDP – virtually none of this will come through in 2026.
That is absolutely key. Investors had already begun to reach that conclusion after the U-turn on hiking income tax a couple of weeks ago; gilt yields rose by 21bp in the immediate few days that followed, before falling back thereafter. A more significant fall in yields today would have required a greater share of the tax hikes to kick in immediately.
Tax threshold freezes – a key plank of this budget – are already frozen until 2028. Extending them into the next decade will raise an additional £8bn, but not immediately. Changes to pension taxation and a levy on high value properties are similarly delayed. For investors, it does beg the question of whether these policies get watered down – particularly with the next election set to coincide with many of these planned tax hikes.
Zooming out a bit though, the UK’s public finances are set to improve next year – and the Autumn Budget doesn’t change that. Public Sector Net Borrowing is forecast to fall from 4.5% this year, to 3.5% next, in large part because of the long-standing freeze in income tax thresholds. Importantly, the government has resisted pressure to increase departmental budgets in 2026 more aggressively, too. Those budgets will increase by 1.8% in real terms next year, considerably less generous than the 3.3/3.4% increases seen through FY2024 and 2025.
Add that all together, and the Debt Management Office has confirmed that it expects issuance to be lower in FY2026.