Introduction: Will tax-heavy budget reassure bond markets?<\/p>\n
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.<\/p>\n
\u201cYou can please some of the people all of the time, you can please all of the people some of the time, but you can\u2019t please all of the people all of the time,\u201d as the old quote has it.<\/p>\n
And today, chancellor Rachel Reeves faces the challenging task of pleasing (or at least not displeasing too badly) four different constituencies \u2013 Labour MPs, voters, businesses, and the bond market \u2013 with her budget announcement, which is likely to be heavy on taxes.<\/p>\n
Reeves faces a tough task, given the \u00a39.9bn headroom to keep within her fiscal rules has been eroded by higher borrowing costs, and welfare U-turns.<\/p>\n
A downgraded OBR productivity<\/a> forecast expected today adds to the chancellor\u2019s challenge of remaining on track for the current budget to be in balance in 2029-30 (the government\u2019s fiscal mandate).<\/p>\n Ideally, Reeves would like to end up with more headroom than before, to protect the UK against volatile government bond markets.<\/p>\n Investors will be watching closely to see how (and indeed if) she achieves this.<\/p>\n One option is to spend less. Labour MPs, though, are opposed to spending cuts, as shown by the revolt against the government\u2019s welfare reforms.<\/a><\/p>\n Reeves tried to sweeten her party earlier this week, telling them the budget would include some measures they\u2019ll like, and calling it \u201ca package not a pick and mix \u2026 you can\u2019t say I like the cola bottles but not the fruit salad\u201d.<\/p>\n Potential tasty \u2018cola bottle\u2019 measures are the end of the two-child benefit cap, to fight poverty, and help on energy bills, to battle the cost of living squeeze.<\/p>\n Raising taxes is another lever, but Reeves appears to have lost her appetite for a manifesto-breaking rise in income tax. That means we may get a \u2018smorgasbord\u2019 of smaller tax rises, including a \u2018stealth tax\u2019 freeze on income tax thresholds.<\/p>\n Some will fall on businesses; gambling firms could face higher taxes, while a reported plan to tighten the rules on salary sacrifice schemes<\/a> would cost employers and employees.<\/p>\n The third funding option is to borrow more, but that\u2019s not practical when keeping within the fiscal rules. If bond traders sniff more debt is coming, they would demand higher rates of return when buying new bonds, and potentially rush to sell gilts they already hold, driving up bond yields.<\/p>\n To keep the bond markets calm, Reeves really needs to increase her headroom \u2013 perhaps to as much as \u00a320bn, up from that \u00a39.9bn figure. But that could require \u00a330bn of tax rises and spending cuts, to address the erosion in the fiscal position since March\u2019s spring statement.<\/p>\n As Peter Arnold, EY UK chief economist, explains:<\/p>\n \u201cThe Government is expected to need to find between \u00a325-30bn in order to keep within its fiscal rules, presenting challenging tax and spending decisions, and it may seek to go even further to create additional fiscal headroom.<\/p>\n \u201cA key priority for the Chancellor will likely be demonstrating a commitment to stability by maintaining the fiscal rules. Reassuring the financial markets in this way could reduce bond yields and, in turn, decrease debt interest payments, opening up headroom later down the line.<\/p>\n The Chancellor will also be mindful of the need to display a clear, consistent growth narrative and address the UK economy\u2019s persistent sluggishness, so we may see announcements that involve a continued focus on planning reform, programmes to encourage people back into work, and reductions to the compliance burden on businesses.<\/p>\n Neil Wilson, UK investment strategist at Saxo Bank, warns that the markets could wobble if the budget doesn\u2019t land well, saying:<\/p>\n And there is ample reason to think it won\u2019t. For starters it\u2019s hard to see how the Chancellor can pull off tax hikes that won\u2019t crimp growth, forcing the Bank of England into more aggressive rate cuts (that\u2019s the best outcome we can foresee).<\/p>\n At worst it\u2019s going to be a currency-toxic combination of fiscal tightening of the most productive bits of the economy, sharp contraction in growth, deeper monetary easing and the cherry on the top of a political crisis as Labour MPs start to move on the Reevers\/Starmer leadership.<\/p>\n If we see a sharp move up in gilt yields \u2013 say because the market doesn\u2019t believe that spending restraint pencilled in for the end of the parliament is possible \u2013 this could precipitate a negative feedback to sterling as markets would price in political uncertainty re the leadership and inevitably start to fret over a more left-leaning govt and endless tax-and-spend.<\/p>\n Remember, Reeves has hung her hat on the bond market – her future is in the hands of the bond vigilantes. If Reeves threads the needle and delivers respectable tax cuts and the bond market continues to give her a pass as the only truly credible candidate as Chancellor, sterling could see a big pop in a relief rally.<\/p>\n So it could be a dramatic day in the City, as well as in Westminster.<\/p>\n The agenda:<\/p>\n 12.30pm GMT: Rachel Reeves to present the budget<\/p>\n 1.30pm GMT (approx): Office for Budget Responsibility to release its economic and fiscal outlook<\/p>\n 1.30pm GMT US weekly jobless claims data<\/p>\n 2.30pm GMT: OBR press conference<\/p>\n Share<\/a><\/p>\n Key events<\/p>\n Show key events only<\/p>\n Please turn on JavaScript to use this feature<\/p>\n The pound is marginally higher this morning, as the City awaits the budget announcement.<\/p>\n Sterling has crept up by a tenth of a cent against the US dollar, to $1.3177, a modest move.<\/p>\n It\u2019s also a teensy bit higher (+0.08%) against the euro at \u20ac1.138.<\/p>\n The pound has been weakening in recent weeks, ahead of the budget, so the Treasury will be hoping we don\u2019t see a repeat of the plunge after Liz Truss\u2019s mini-budget three years ago<\/a>.<\/p>\n Francesca Fornasari, head of currency at Insight Investment, has said:<\/p>\n \u201cSterling\u2019s reaction to Wednesday\u2019s budget remains highly uncertain, but much of the negative news is likely to be already reflected in current valuations. It wouldn\u2019t surprise me to see the currency rally a little on the day once the scope for more bad news is over.<\/p>\n Share<\/a>How to keep the bond market happy today<\/p>\n The bond market reaction will be crucial to how the Budget is perceived by investors, reports Kathleen Brooks, research director at brokerage XTB:<\/p>\n Ultimately the bond market wants to see cuts in government spending and revenue generators that do not stoke inflation. However, a higher than inflation rise in the national living wage, along with large spending increases may leave the bond market disappointed.<\/p>\n In the lead up to this Budget, yields have been falling. In the past week, the UK bond market has been the top performer bar the US, and 10-year Gilt yields have fallen by more than 10 bps. However, the bond market is unlikely to tolerate any increase in borrowing in this Budget, or any move from the Chancellor to distance herself from her own fiscal rules.<\/p>\n Fiscal headroom also needs to be higher than the \u00a310bn last year. A figure between \u00a315bn and \u00a320bn could be warmly received by the bond market.<\/p>\n Brooks adds that the Budget needs to deliver three things to keep the bond market happy and sterling stable:<\/p>\n An increase in fiscal headroom.<\/p>\n Front loaded fiscal tightening, preferably with spending cuts.<\/p>\n A firm commitment from the Chancellor that this will be the last time that she uses the budget for tax raids. This could boost spending and confidence in the economy and help boost growth.<\/p>\n Share<\/a><\/p>\n Updated at\u00a003.14 EST<\/p>\n Rachel Reeves has also pledged to keep a \u2018tight grip\u2019 on the public finances.<\/p>\n In her video address ahead of the budget, the chancellor says:<\/p>\n I will take action to cut our debt and borrowing, by keeping a tight grip on the country\u2019s finances<\/p>\n Ther is nothing progressive, nothing fair, about spending one in every 10 pounds of government spending just servicing the national debt.<\/p>\n Share<\/a>UK inflation expectations fall sharply, teeing up date cuts<\/p>\n There\u2019s good news for Rachel Reeves this morning \u2013 the British public\u2019s expectations for inflation have fallen sharply this month.<\/p>\n Expectations for inflation over the next 12 months fell to 3.7% in November from 4.2% the previous month, a survey carried out by YouGov for the US bank Citi showed on Wednesday.<\/p>\n Citi said the reading could boost the chances of a December rate cut by the Bank of England\u2019s monetary policy committee (MPC).<\/p>\n Long-term inflation expectations also fell to 3.9% in November from 4.2% in October.<\/p>\n Citi economists say:<\/p>\n \u201cIf this downgrade is replicated, both over time and across the various inflation expectation surveys, we think it could challenge the idea prevalent in the MPC that expectations are an ongoing barrier to both a lower terminal rate and a faster pace of cuts.\u201d<\/p>\n UK interest rates have been on hold at 4% since August, but the City broadly expects a cut to 3.75% in December.<\/p>\n Share<\/a><\/p>\n Deutsche Bank\u2019s UK economist, Sanjay Raja, has predicted that Rachel Reeves will deliver a second \u201chistoric tax-raising budget\u201d, although the scale won\u2019t be as large as last year\u2019s effort.<\/p>\n Raja predicts that macro-economic downgrades, policy u-turns, and a push to shore up fiscal resilience will probably lead the Chancellor to deliver nearly \u00a335bn of fiscal consolidation.<\/p>\n That, Raja says, will includes an extension of the freeze in personal tax thresholds, as well as \u201cmeasures targeting wealth, expanding the base for National Insurance contributions, and a slew of sector-specific taxes\u201d, plus higher taxation on housing (either through changes to council tax, or via a mansion tax).<\/p>\n Share<\/a>The budget in five charts<\/p>\n You can get up to speed ahead of today\u2019s budget with our breakdown of five key charts that outline the fiscal backdrop:<\/p>\n For example, here\u2019s one showing how the chancellor\u2019s headroom has been eroded by welfare cut u-turns, and rising borrowing costs:<\/p>\n A chart showing the UK budget headroom<\/a>Share<\/a><\/p>\n The chancellor is expected to cut the maximum amount people can put into tax-efficient cash individual savings accounts from \u00a320,000 a year to \u00a312,000 in Wednesday\u2019s budget.<\/p>\n It\u2019s part of the government\u2019s push to help the London stock market, by encouraging people to funnel more of their cash into the stock market.<\/p>\n But finance bosses have warned that lowering this annual cash Isa limit by 40% could lead to higher mortgage rates and deter consumers from saving.<\/p>\n Share<\/a>Reeves: I know people are angry and frustrated<\/p>\n Rachel Reeves has acknowledged people are \u201cangry at unfairness\u201d in the British economy ahead of unveiling her second Budget today.<\/p>\n In a filmed address ahead of the Budget, the Chancellor said the budget will cut the cost of living, hospital waiting lists, and the cost of the national debt.<\/p>\n She says the government had started to see results in the past year with \u201cwages rising faster than inflation, hospital waiting lists coming down, and our economy growing faster and stronger than people expected\u201d.<\/p>\n \u201cBut I know there is more to do,\u201d she said, adding:<\/p>\n \u201cI know that the cost of living is still bearing down on family finances, I know that people feel frustrated at the pace of change, or angry at the unfairness in our economy.<\/p>\n \u201cI have to be honest that the damage done from austerity, a chaotic Brexit and the pandemic were worse than we thought.<\/p>\n \u201cBut I\u2019m not going to duck those challenges, and nor will I accept that our past must define our future. It doesn\u2019t have to.\u201d<\/p>\n The chancellor says the budget will help create a fairer, stronger and more secure country.<\/p>\n And she denied bringing back austerity, saying:<\/p>\n \u201cToday I\u2019m going to take the fair and necessary choices to deliver on our promise of change.<\/p>\n I\u2019m not going to return Britain back to austerity, nor will I lose control of public spending with more reckless borrowing.<\/p>\n Share<\/a><\/p>\n Updated at\u00a003.00 EST<\/p>\n Anti-austerity protests last night<\/p>\n There were protests outside Downing Street last night, ahead of the budget, organised by Stop the War Coalition and The People\u2019s Assembly.<\/p>\n Carrying placards reading \u201cTax the rich\u201d, \u201cCut War Not Welfare\u201d, and \u201cWelfare Not Warfare\u201d, the gathering pushed the government to avoid an austerity agenda, resist cuts, invest in pubic services, and increase the tax burden on the wealthiest.<\/p>\n Activists gathered at Downing street to protest against expected austerity measures in the budget. Photograph: Guy Smallman\/Getty Images<\/p>\n Farmers are planning to protest in Westminster today, over the changes to inheritance tax announced last year. However, they have been blocked from bringing their tractors by the Metropolitan Police<\/a>\u2026 who say the protests can still go ahead otherwise.<\/p>\n Conditions have been placed on the farmers protest planned for tomorrow in Westminster. <\/p>\n People will still be able to demonstrate, however, conditions have been put in place to prevent protesters from bringing vehicles, including tractors or other agricultural vehicles, to the\u2026<\/p>\n \u2014 Metropolitan Police (@metpoliceuk) November 25, 2025<\/a><\/p>\n There are suggestions online that we\u2019ve banned farmers from protesting tomorrow. That\u2019s not correct. <\/p>\n Farmers are welcome to protest, but we must balance the impact protests have on the rights of all Londoners. <\/p>\n That is why we have put conditions in place to prevent serious\u2026<\/p>\n \u2014 Metropolitan Police (@metpoliceuk) November 25, 2025<\/a><\/p>\n Share<\/a>Resolution Foundation: National wage rise for 18-20 year olds could backfire<\/p>\n The Resolution Foundation, the think tank set up to improve the living standards for those on low to middle incomes, has also voiced concerns about the minimum wage increase announced last night<\/a>.<\/p>\n Resolution point out that raising the National Living Wage (NLW) by 4.1% next April will deliver a welcome boost to more than two million workers and their families.<\/p>\n However, they also fear the \u201cunnecessarily big rise\u201d of 8.5% in the rate for 18-20 year olds will make it harder for young people to find a job, at a time when more young people who are not in employment, education or training (NEET) (up 185,000 over the past year).<\/p>\n Nye Cominetti, principal economist at the Resolution Foundation, said:<\/p>\n \u201cThe latest rise in the National Living Wage \u2013 while small compared to recent history \u2013 will nonetheless deliver a welcome wage boost to more than two million workers and their families.<\/p>\n \u201cYounger workers are set for an even bigger pay rises \u2013 but these steep increases risk causing more harm than good if they put firms off hiring and push up NEET rates.<\/p>\n \u201cThe minimum wage has good to claim to be Britain\u2019s biggest policy success in a generation. But at its higher level the Government and Low Pay Commission need to act with more flexibility when setting rates so they can respond to changing labour market conditions.\u201d<\/p>\n Share<\/a>Hospitality industry warns minimum wage rise will push up prices<\/p>\n Last night, the UK learned that the minimum wage will rise by 4.1% next year, meaning a pay rise for millions of lower-paid workers.<\/p>\n The national living wage will rise from \u00a312.21 to \u00a312.71 an hour from April for over-21s, while the minimum wage for 18- to 20-year-olds will increase by 8.5% to \u00a310.85 an hour, narrowing the gap with older workers.<\/p>\n Unions have hailed the move, with the GMB calling it \u201cfantastic news for millions of low-paid workers across the country.\u201d<\/p>\n Businesses, though, are warning that they may have to pass the cost onto customers through higher prices.<\/p>\n Kate Nicholls, chair of UKHospitality, said:<\/p>\n \u201cIncreases to minimum wage rates are yet another cost for hospitality businesses to balance, at a time when they are already being taxed out.<\/p>\n \u201cThese additional costs make action at the Budget to reduce hospitality\u2019s tax burden even more important, especially if businesses are expected to sustain this level of annual wage increase.<\/p>\n \u201cHospitality businesses have reached their limit of absorbing seemingly endless additional costs. They will simply all be passed through to the consumer, ultimately fuelling inflation.<\/p>\n Share<\/a>Possible tax rises today<\/p>\n Rather a lot of today\u2019s budget statement has already been trailed in the media, in the long build up to today\u2019s announcement.<\/p>\n Some of the tax rises Reeves is likely to opt for include:<\/p>\n Freezing income tax thresholds for an extra two years to 2030, bringing more people into higher tax bands as wages rise.<\/p>\n Making salary sacrifice schemes less generous, including those for pension contributions.<\/p>\n A pay-per-mile scheme<\/a> on electric cars to help fill the tax gap from petrol duty as more people opt for green vehicles.<\/p>\n Bringing in higher tax on the most expensive properties, including a surcharge on the highest-value houses. The surcharge will reportedly be targeted at homes worth more than \u00a32m, after worries that a lower \u00a31.5m threshold would hit too many in the south-east.<\/p>\n The Daily Telegraph are reporting middle-class families face a \u201cdirty dozen\u201d tax rises in the Budget \u2013 if you include the charges on tourists visiting major cities announced yesterday, higher levies on the betting industry, and the closing of a loophole on Chinese imports that has been used by fast fashion giants such as Shein\u2026.<\/p>\n Share<\/a>Goldman Sachs predicts \u00a330bn of tax rises<\/p>\n Goldman Sachs have predicted that Rachel Reeves will increase her budget headroom to \u00a315bn, from \u00a310bn in the last budget, mainly through higher taxes.<\/p>\n Reminder, this is the flexibility to hit government\u2019s first fiscal rule, to be on track to achieve a current budget surplus, where day-to-day spending is less than total revenues in 2029\u201330.<\/p>\n Goldman economist James Moberly predicted last week that the government heads into the budget with a \u00a320bn deterioration in its headroom against the deficit rule (due to the expected downgrade of Britain\u2019s economic prospects by the OBR, higher debt costs, and the reversal of planned welfare cuts<\/a>).<\/p>\n In addition, potential measures such as freezing fuel duty (again) and lifting the child benefit cap (finally) would cost \u00a38bn.<\/p>\n In that scenario, a gross consolidation of around \u00a333bn would be needed to grow the headroom to \u00a315bn.<\/p>\n Moberly explains:<\/p>\n We expect only modest spending cuts of around \u00a33bn, implying that around \u00a330bn of tax increases are likely required.<\/p>\n After the government reportedly reversed plans to raise income tax rates, an extension of threshold freezes combined with a series of smaller measures now looks the most likely avenue to raise revenues.<\/p>\n Share<\/a>Introduction: Will tax-heavy budget reassure bond markets?<\/p>\n Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.<\/p>\n \u201cYou can please some of the people all of the time, you can please all of the people some of the time, but you can\u2019t please all of the people all of the time,\u201d as the old quote has it.<\/p>\n And today, chancellor Rachel Reeves faces the challenging task of pleasing (or at least not displeasing too badly) four different constituencies \u2013 Labour MPs, voters, businesses, and the bond market \u2013 with her budget announcement, which is likely to be heavy on taxes.<\/p>\n Reeves faces a tough task, given the \u00a39.9bn headroom to keep within her fiscal rules has been eroded by higher borrowing costs, and welfare U-turns.<\/p>\n A downgraded OBR productivity<\/a> forecast expected today adds to the chancellor\u2019s challenge of remaining on track for the current budget to be in balance in 2029-30 (the government\u2019s fiscal mandate).<\/p>\n Ideally, Reeves would like to end up with more headroom than before, to protect the UK against volatile government bond markets.<\/p>\n Investors will be watching closely to see how (and indeed if) she achieves this.<\/p>\n One option is to spend less. Labour MPs, though, are opposed to spending cuts, as shown by the revolt against the government\u2019s welfare reforms.<\/a><\/p>\n Reeves tried to sweeten her party earlier this week, telling them the budget would include some measures they\u2019ll like, and calling it \u201ca package not a pick and mix \u2026 you can\u2019t say I like the cola bottles but not the fruit salad\u201d.<\/p>\n Potential tasty \u2018cola bottle\u2019 measures are the end of the two-child benefit cap, to fight poverty, and help on energy bills, to battle the cost of living squeeze.<\/p>\n Raising taxes is another lever, but Reeves appears to have lost her appetite for a manifesto-breaking rise in income tax. That means we may get a \u2018smorgasbord\u2019 of smaller tax rises, including a \u2018stealth tax\u2019 freeze on income tax thresholds.<\/p>\n