2 December, 2025

UK Budget Sets Sights on Fiscal Balance

Summary

Highlights

UK budget projects less debt issuance in the near term (vs. market expectations), explaining the calm reaction in bond yields.
However, an increase in the tax burden in the coming years will weigh on demand and economic growth.
Consequently, the Bank of England could cut interest rates, although much would depend on its inflation assessment.

2025.12.01 -news - Weekly-Market-Directions

In this edition

UK Chancellor Rachel Reeves presented the Autumn budget on 26 November, detailing government plans to improve the fiscal situation, hike some taxes on the wealthy and increase public spending. While the budget strives to reducing government borrowing (as a % of GDP) from 4.5% in financial year 2025-26 to 1.9% in 2030-31, it also raises certain taxes including on dividends and savings income among others. Overall, it balances fiscal prudence with economic growth, which we think will be subdued. As shown in the chart, our economic growth expectations are below the OBR’s projections because we think uncertainty over government spending and external geopolitical risks persists. Collectively, these would weigh on consumption and hence on growth. As a result, the Bank of England will likely reduce interest rates in December and twice next year, bringing the official rates down to 3.25% by the end of 2026.

Key dates

1 Dec

US ISM manufacturing, South Korea trade balance

2 Dec

EZ unemployment rate and CPI, Brazil industrial production

5 Dec

US PCE, Germany factory orders, Reserve Bank of India policy

Read the full article on the Amundi Research center

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