4 November 2025
If you are covering Rachel Reeves’ Budget scene setting speech and the market reaction, please find below a comment from Lindsay James, investment strategist at Quilter:
“In recent weeks the clamour surrounding the upcoming Budget has grown to a dull roar, culminating in today’s speech by Rachel Reeves that effectively confirmed that significant tax rises are needed. Economists and industry commentators have by and large come to the same conclusion which is that the estimated £20-40bn hole in the public finances is too large to be closed with ‘tinkering’ and the Chancellor is likely to have to raise at least one of the three main taxes of income tax, NI and VAT, which account for around 60% of the UK tax base.
“On one hand she has been somewhat unlucky during her time at No.11. The extremely slender £10bn of fiscal headroom was a gamble that didn’t pay off. Each year this headroom typically swings in either direction by around £20bn based on a raft of factors. These include economic growth forecasts, gilt yields, inflation, productivity and external shocks, with policy decisions only one element of the figure. Global economic growth forecasts have softened; UK businesses have seen further barriers to trade erected by the White House whilst productivity continues to languish following decades of cuts to investment.
“However, some of these factors have already been influenced by this government. Higher national insurance contributions by employers, higher minimum wages, a pick-up in public-sector pay awards and weak efforts to reform welfare continue to disincentivise employment and reduce labour supply in the process. Together these actions have stoked inflation and thus keep interest rates, debt servicing costs and the cost of living, higher as a result. Inflation within the labour-intensive service economy remains stuck at 4.7%, well above pre-covid levels.
“Thankfully, the Chancellor seems to be listening to advice to increase the fiscal headroom with her speech suggesting she will look to build ‘more resilient public finances’; a sensible goal but nevertheless one that will add to the short-term pain at the Budget. However, this speech contained no real acknowledgement that deeper spending cuts may be needed.
“Reeves has been helped in recent weeks by the downward trend in government bond yields, partly as a result of global moves but also due to the inflation picture easing marginally. Markets appear not to have overreacted to today’s speech, but they will now be watching closely to see if the pre-Budget rhetoric is followed through with action that actually bolsters the public finances at the same time as promoting economic growth. Tax rises historically dampen economic growth, so it is a balancing act that is difficult to achieve and fraught with risk, and may not actually work in extracting the public finances out of this predicament.”
