UK Budget papers over the cracks but can’t hide the fiscal risks

The UK Budget featured a backloaded tightening of fiscal policy via a series of tax rises. Given most of the tightening is pencilled in for 2029, which is an election year, we’re sceptical it will be fully implemented when the time comes.

• The policy tightening was at the lower end of expectations, reflecting smaller revisions to forecast borrowing by the Office for Budget Responsibility. As the OBR’s new growth forecast is in line with the most optimistic independent forecast, we think this will store up problems for the future.
• Higher headroom for the government reduces the risk we’re in the same situation next year. But the backloaded nature of the measures, the uncertain impact on revenues of many of the tax-raising measures, a lack of spending restraint, and the absence of any growth measures undermine the credibility of the package, in our view.
• The Budget measures won’t trigger substantial changes to our already below-consensus GDP forecasts for the UK for 2026 and 2027. However, we think markets will gradually lose faith, and the risk of a sudden confidence crisis remains live.