Chancellor Rachel Reeves is preparing for the Office for Budget Responsibility's (OBR) verdict on her autumn budget, due in less than three weeks. While gilt markets have rallied recently, lowering government borrowing costs, the bond market remains a key concern. Reeves has signalled fiscal discipline to reassure investors, but balancing tax hikes and spending cuts is fraught with risk.
Bond investors, including analysts at Barclays, view spending reform as a “totemic issue.” They warn that the government's failure to cut £5bn from welfare earlier this year was a “red flag.” Some argue that tax increases could harm growth, locking the UK in a low-growth, high-debt cycle. Hedge fund RBC BlueBay's Mark Dowding advocates welfare cuts to prevent a “culture of benefits dependency.”
However, critics say the City's focus on welfare is simplistic. Total welfare spending, while rising in cash terms from £300bn to £370bn by the decade's end, is projected to remain flat as a share of GDP. Much of the increase stems from the pensions triple lock and rising disability benefits, reflecting an ageing and unhealthier population.
Welfare currently supports over 24 million people, with 13.1 million pensioners and 10 million working-age adults. Despite pressures, the proportion of GDP spent on welfare is not expected to grow. Reeves must weigh bond market demands against the risk that tax rises could stifle growth, which is the government's top priority.
