Chancellor Rachel Reeves is set to unveil her autumn budget on Wednesday, after months of speculation over tax rises. The speech comes with the government under intense pressure to address a multibillion-pound shortfall in the public finances. Reeves has said her priorities are cutting NHS waiting lists, reducing the national debt, and easing the cost of living.
Reeves has committed to an “ironclad” fiscal rule requiring day-to-day spending to be matched by receipts in the fifth year of the Office for Budget Responsibility’s (OBR) forecast. In the spring, she left a £9.9bn reserve as a buffer, but this is expected to have been erased by higher borrowing costs, welfare U-turns, and an anticipated OBR productivity downgrade. Most economists expect a gap of up to £20bn, with the Institute for Fiscal Studies predicting a £12bn deficit. To restore her spring headroom, Reeves would need to raise £22bn.
A key factor is a dramatically weaker productivity forecast. The OBR has historically overestimated growth in output per hour, which drives economic growth, wages, and living standards. Each 0.1-percentage-point downgrade to productivity would increase public borrowing by £7bn in 2029-30. Reeves is understood to be frustrated by the timing of the watchdog’s assessment. While the UK was the fastest-growing G7 country in the first half of the year, overall growth remains lacklustre amid tax rises, elevated borrowing costs, and subdued confidence.
Bond market reactions will be critical. The yield on 10-year UK government bonds has fallen in recent months but remains elevated at about 4.5%, the highest in the G7, while the 30-year yield is close to its highest level since 1998. Investors are fretting over the UK’s fiscal position, with national debt at nearly 100% of GDP. Annual debt interest costs are running at £100bn, equivalent to £1 in every £10 of Treasury spending, so Reeves will hope to coax yields down.
Labour promised not to raise taxes on “working people” through income tax, national insurance contributions, or VAT, and pledged not to raise corporation tax rates. Economists expect Reeves to opt for a smorgasbord of smaller tax rises and spending cuts. However, such measures risk a “pasty tax”-style backlash, as seen after George Osborne’s 2012 budget. Critics will also note OBR forecasts showing tax as a share of GDP at its highest level since the second world war.
