Quarterly Outlook
Q4 Outlook for Investors: Diversify like it’s 2025 – don’t fall for déjà vu
Jacob Falkencrone
Global Head of Investment Strategy
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Budget Wrap: Backloaded consolidation, frontloaded spending - what's changed?
Neil Wilson
Investor Content Strategist
TL/DR: Big spending increases frontloaded, massive tax increases and restraint backloaded...the classic policy mix you cannot believe: jam today, pain tomorrow. I hardly think it seems credible.
And there is more borrowing from a worse starting point while growth is slowing. The OBR says that “relative to March the fiscal consolidation starts from a higher borrowing level and is more backloaded, with measures pushing a greater share of the consolidation later in the forecast, to 2028-29 and 2029-30".
This ought not to be a positive for gilts or sterling – the market may be swallowing the figures now, but I would question whether such a relaxed reaction is tenable. obviously the DMO has upped its issuance guidance a bit less than expected, which the market liked. However, even there we can see debt issuance falling more slowly in future years than was previously forecast. The requirement for 2027-28 was revised up sharply to £308.4bn from £265.6 billion. Total financing requirement over the next four years is seen £77.7bn more than set out in March.
Overview
GBPUSD traded in a range of about 100bps, swinging from a low around 1.3120 to a high around 1.3220...gilts did the hokey-cokey a bit too before catching some bid from the DMO to see yields decline a touch, especially at the long end with the 30yr down ~8bps and 2yr down –3bps as expectations for the Bank of England policy rate haven’t budged much. The FTSE 100 and FTSE 250 both turned higher as details emerged showing limited target hits on specific sectors. Housebuilders sold off on the mansion tax before coming back, bookies mainly erased declines to trade higher, while bank stocks rallied on the lack of any tax raid on lenders.
Fiscal rules met and headroom doubled to £21.7bn, more in line with recent history. Main lever for raising receipts is fiscal drag as personal allowance thresholds are frozen (for 3 years not 2 as expected) – this and several other measures that will take time to effect (2-3 years for most) means a lot of the tax hikes are backdated to the end of the parliament. It’s questionable whether fiscal restraint in the form of welfare reform or tax hikes just as an election draws near is all that plausible.
The only welfare reform was a cut to Motability spending – the main thrust of welfare change was spending a lot more. It is unclear whether, for instance, there is a clear plan to reduce sickness benefits, which are expected to balloon to £103.6bn by 2029-30, higher than previously forecast, from £83.1bn.
And on growth, the outlook is hardly positive. The OBR: "We have assessed that none of the policy measures in this Budget have a sufficiently material impact to justify adjusting our post-measures potential output forecast."
On the plus side for the government the DMO projects a smaller-than-expected increase in gilt issuance this fiscal year and it has reduced its forecast for longer-dated gilt sales, which has had a positive effect on the long end of the rate curve. Structural changes in the demand side of the gilt market means it’s vital the DMO shortens duration.
For savers and investors, the key changes are higher tax rates on dividends and savings, plus the capping of salary sacrifice for pensions and the cash ISA limit is cut to £12k a yea, which could help drive more retail investment. The ISA changes combined with increased property taxation can help make long-term equity investing relatively more attractive than investing in residential properties. Cash savers will be disappointed – allowance cut and tax rate on non-ISA savings increased. But it’s important to drive behavioural shifts to encourage consumers to invest for the long term. The reduction in the cash allowance combined with the increase of all income outside of tax wrappers (dividends, savings and property income) makes the ISA all the more important for investors.
Tax & Spend
Spending up every year by £11 billion primarily to pay for the summer reversals to welfare cuts and lift the two-child limit in universal credit, whilst taxes rise by £26 billion in 2029-30, taking the tax take to an all-time high of 38 per cent of GDP in 2030-31. The net impact of Budget spending and tax policies increases borrowing by £5 billion on average over the next three years but then reduces it by £13 billion on average in the following two.
The direct effects of Budget policies increase borrowing by £6 billion next year but reduce it by £15 billion in 2029-30.
And there is more borrowing from a worse starting point while growth is slowing. The OBR says that “relative to March the fiscal consolidation starts from a higher borrowing level and is more backloaded, with measures pushing a greater share of the consolidation later in the forecast, to 2028-29 and 2029-30".
This ought not to be a positive for gilts or sterling – the market may be swallowing the figures now, but I would question whether such a relaxed reaction is tenable. obviously the DMO has upped its issuance guidance a bit less than expected, which the market liked. However, even there we can see debt issuance falling more slowly in future years than was previously forecast. The requirement for 2027-28 was revised up sharply to £308.4bn from £265.6 billion. Total financing requirement over the next four years is seen £77.7bn more than set out in March.
Overview
GBPUSD traded in a range of about 100bps, swinging from a low around 1.3120 to a high around 1.3220...gilts did the hokey-cokey a bit too before catching some bid from the DMO to see yields decline a touch, especially at the long end with the 30yr down ~8bps and 2yr down –3bps as expectations for the Bank of England policy rate haven’t budged much. The FTSE 100 and FTSE 250 both turned higher as details emerged showing limited target hits on specific sectors. Housebuilders sold off on the mansion tax before coming back, bookies mainly erased declines to trade higher, while bank stocks rallied on the lack of any tax raid on lenders.
Fiscal rules met and headroom doubled to £21.7bn, more in line with recent history. Main lever for raising receipts is fiscal drag as personal allowance thresholds are frozen (for 3 years not 2 as expected) – this and several other measures that will take time to effect (2-3 years for most) means a lot of the tax hikes are backdated to the end of the parliament. It’s questionable whether fiscal restraint in the form of welfare reform or tax hikes just as an election draws near is all that plausible.
The only welfare reform was a cut to Motability spending – the main thrust of welfare change was spending a lot more. It is unclear whether, for instance, there is a clear plan to reduce sickness benefits, which are expected to balloon to £103.6bn by 2029-30, higher than previously forecast, from £83.1bn.
And on growth, the outlook is hardly positive. The OBR: "We have assessed that none of the policy measures in this Budget have a sufficiently material impact to justify adjusting our post-measures potential output forecast."
On the plus side for the government the DMO projects a smaller-than-expected increase in gilt issuance this fiscal year and it has reduced its forecast for longer-dated gilt sales, which has had a positive effect on the long end of the rate curve. Structural changes in the demand side of the gilt market means it’s vital the DMO shortens duration.
For savers and investors, the key changes are higher tax rates on dividends and savings, plus the capping of salary sacrifice for pensions and the cash ISA limit is cut to £12k a yea, which could help drive more retail investment. The ISA changes combined with increased property taxation can help make long-term equity investing relatively more attractive than investing in residential properties. Cash savers will be disappointed – allowance cut and tax rate on non-ISA savings increased. But it’s important to drive behavioural shifts to encourage consumers to invest for the long term. The reduction in the cash allowance combined with the increase of all income outside of tax wrappers (dividends, savings and property income) makes the ISA all the more important for investors.
Tax & Spend
Spending up every year by £11 billion primarily to pay for the summer reversals to welfare cuts and lift the two-child limit in universal credit, whilst taxes rise by £26 billion in 2029-30, taking the tax take to an all-time high of 38 per cent of GDP in 2030-31. The net impact of Budget spending and tax policies increases borrowing by £5 billion on average over the next three years but then reduces it by £13 billion on average in the following two.
The direct effects of Budget policies increase borrowing by £6 billion next year but reduce it by £15 billion in 2029-30.
Spending policies in this Budget increase borrowing in every year, by £7 billion next year and by £11 billion in 2029-30.
The indirect effects of Budget policy measures on the economy are estimated to lower borrowing by £2 billion in 2026-27 largely thanks to the impact of lower inflation on debt interest spending.
From 2027-28 onwards, the indirect effects of policy add to borrowing by amounts rising to £5 billion in 2029-30, mainly due to higher debt interest spending from additional borrowing in the early years of the forecast, and from lower receipts, as the personal tax rises reduce consumption and lower inflation reduces nominal earnings.
Public sector net debt is forecast to rise from 95.0 per cent of GDP this year to a peak of 97.0 per cent of GDP in 2028-29. It declines slightly to 96.1 per cent of GDP in 2030-31.
The tax-to-GDP ratio is forecast to increase to an all-time high of 38.3 per cent of GDP in 2030-31.
From 2027-28 onwards, the indirect effects of policy add to borrowing by amounts rising to £5 billion in 2029-30, mainly due to higher debt interest spending from additional borrowing in the early years of the forecast, and from lower receipts, as the personal tax rises reduce consumption and lower inflation reduces nominal earnings.
Public sector net debt is forecast to rise from 95.0 per cent of GDP this year to a peak of 97.0 per cent of GDP in 2028-29. It declines slightly to 96.1 per cent of GDP in 2030-31.
The tax-to-GDP ratio is forecast to increase to an all-time high of 38.3 per cent of GDP in 2030-31.
Growth
Real GDP is forecast to grow by 1.5 per cent on average over the forecast, 0.3 percentage points slower than projected in March, due to lower underlying productivity growth.
The jobs market seen softer, with unemployment rate seen steady around the 5% level that it is now.
Inflation
The OBR predicts higher food and services prices will push CPI inflation up to 3.5 per cent in 2025 and 2.5 per cent in 2026, respectively 0.2 and 0.4 percentage points higher than the March forecast. And it forecasts inflation to return to the Bank of England’s 2 per cent target in 2027, a year later than forecast in March. Sticky inflation remains, which has left BoE expectations barely changed for the next year.
Personal tax
Freezing thresholds is the main lever – effectively a hike to income tax and NICs in the post that raises £8bn. The only real surprise is that the freeze is for another 3 years, not just the 2 expected.
The income tax personal allowance, the higher-rate threshold and additional-rate threshold are frozen at £12,570, £50,270 and £125,140, respectively, until 2030-31.
The NICs secondary threshold is frozen until 2030-31. This threshold was reduced from £9,100 to £5,000 as part of the changes to employer NICs announced at Autumn Budget 2024.
Property
Owners of properties valued at over £2 million will be liable for a recurring annual charge in addition to council tax. There will be four price bands with the surcharge rising from £2,500 for a property valued in the lowest £2 million to £2.5 million band, to £7,500 for a property valued in the highest band of £5 million or more, all uprated by CPI inflation each year. This will inevitably distort the property market as it creates slabs/cliff-edges.
Landlords will be hit with a 2 percentage point increase to the basic, higher and additional rates of property income tax, increasing them to 22, 42 and 47 per cent respectively. This could some landlords to sell up.
Housebuilder shares were initially hit - Taylor Wimpey, Baratt Redrow, Persimmon, Berkely Group –2-3% before turning firmer.
Savings & Investments
Cash ISA allowance effectively cut to £12,000, as was anticipated. £8k of ISA allowance has to be in investments, while the overall allowance stays at £20k.
From April 2027, a 2 percentage point increase to the basic, higher and additional rates of saving income tax, increasing them to 22, 42 and 47 per cent respectively.
From April 2026, a 2 percentage point increase to the basic and higher rates of tax on dividends, raising them to 10.75 and 35.75 per cent respectively.
The capital gains tax relief on disposals to employee ownership trusts (EOT) will be reduced from 100 per cent to 50 per cent from November 2025.
Pensions
Salary-sacrifice pension contributions above an annual £2,000 threshold will no longer be exempt from NICs from April 2029. This means that salary-sacrificed pension contributions above £2,000 will be treated as ordinary employee pension contributions in the tax system and therefore be subject to both employer and employee NICs. No raid on the 25% tax-free lump sum, no raid on pension tax relief.
Businesses
Changes to business rate multiplier that will reduce rates for retail, hospitality and leisure properties, and increase rates for high value properties.
Motorists
A five-month freeze to fuel duty rates until September 2026 at which point it states that the five pence cut first introduced in 2022 will be reversed through a staggered approach.
The Chancellor also introduced a new mileage-based charge on electric cars, additional to the current vehicle excise duty (VED) charges paid by all vehicles, which will be introduced in April 2028. In 2028-29, the charge will equal £0.03 per mile for battery electric cars and £0.015 per mile for plug-in hybrid cars, with the rate per mile increasing annually with CPI.
Bookmakers
From April 2026 there will be an increase in remote gaming duty from 21 to 40 per cent and abolition of bingo duty from its current 10 per cent rate. From April 2027, general betting duty for remote betting will rise from 15% to 25% excluding self-service betting terminals, spread betting, pool bets, and horseracing. It will remain at 15% for shops and there are no changes to pub machines. We saw a steep decline in bookies’ shares as the OBR pointed to steep tax hikes for the sector but then snapback higher as details emerged of the breakdown. Entain and Flutter turned higher and Evoke came off its lows of the day but remains –11% as the owner of 888 and William Hill is more exposed to the increases.
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