Chancellor Rachel Reeves is bracing for the first verdict on her tax and spending plans from the Office for Budget Responsibility (OBR) on Monday, with less than three weeks until the autumn budget. After weeks of speculation about a fiscal gap of up to £30bn, the OBR's assessment will be crucial in shaping the final package.
Gilt markets have rallied in recent weeks, lowering government borrowing costs, partly due to falling US rates and Reeves's commitment to fiscal discipline. However, bond market pressure remains a key concern. Reeves has warned that ignoring market reactions could drive up borrowing costs, but bending to investor demands carries its own risks.
In the City, investors are pushing for tough public spending cuts, particularly to welfare, as a stronger signal of budget discipline than tax hikes. Barclays analysts noted that the government's earlier failure to cut £5bn from welfare was a 'red flag' for gilt markets. Some investors argue that tax increases could reduce growth, locking the UK in a low-growth, high-debt cycle.
Critics, however, describe the City's welfare-cutting bias as 'simplistic and misplaced.' Total welfare spending in cash terms is rising, driven by the pensions triple lock and rising disability benefits, partly due to an ageing and unwell population. But as a share of GDP, welfare spending is projected to remain flat through the end of the decade.
The chancellor faces a delicate balancing act: raising taxes without hurting growth, while keeping bond markets placated. The Bank of England could support by cutting rates, but any slowdown would hit tax receipts and living standards, jeopardising Labour's re-election chances.
