Coface economist Jonathan Steenberg gives his reaction to the Chancellor’s speech on 26 November.
Rachel Reeves had the challenge of generating substantial additional revenue to offset higher spending, lower tax receipts, and rising borrowing costs, compounded by the Office for Budget Responsibility’s (OBR) decision to downgrade its growth forecast. For businesses, this budget signals a period of tighter margins and cautious spending, but it also offers clues on where opportunities may emerge, particularly in sectors linked to housing and infrastructure.
This was a tax-raising budget intended to secure a budget buffer of £22 billion withtargeted tax rises totalling £26 billion (0.7% of GDP) although most significant tax increases are not due to come into effect until 2028/29.
Meanwhile spending commitments in the budget amounted to £11 billion more than those announced in the Spring Statement.
Key measures include:
- Freezing income tax thresholds until 2030–31 and increasing taxes on wealth
- A mileage-based charge for electric vehicles
- Gambling duty reform
- Changes to writing down allowances
- The removal of the controversial two-child benefit cap.
What does the budget tell us about the state of the UK economy?
While the OBR has raised its forecast for GDP growth this year to 1.5% (Coface forecast is 1.3%), it downgraded its projections for the next four years and its long-term downgrade of UK productivity (by 0.3 percentage points) means tax revenues are set to be lower than previously forecast over the next five years.
This year’s increases in inflation, together with elevated global government bond yields, have inflated expected borrowing costs which have also been affected by uncertainty surrounding the UK’s fiscal headroom and its policy direction. But even though the Government’s own fiscal rules and bond market expectations require tax rises and spending restraint, its manifesto commitments have limited its ability to manoeuvre.
What are the risks and unknowns with the budget?
With the Chancellor eventually ruling out a rise in income tax after weeks of speculation, market reaction to the budgetwas calmer. Many of the largest revenue-raising measures – notably the freezing of tax thresholds – will not take effect until much later. In addition, the actual tax take is uncertain compared with a straightforward rise in the income tax rate. In the event of a shortfall or further spending increases, the Chancellor may be forced to increase taxes again next time.
There are concerns about whether recent Governments' policies are fiscally sustainable and a government's capacity to raise revenue in the event of an economic shock such as a trade war or another pandemic. In fact, this budget includes more spending increases than tax rises in the first three years, leaving public sector net borrowing £15 billion higher in 2026–27 than projected in March. Concerns about the Government’s direction have already contributed to the recent premium on gilts, particularly at longer maturities, which are particularly sensitive to fiscal sustainability.
This uncertainty around financial sustainability and market confidence could translate into higher borrowing costs for businesses and reduced investor appetite, particularly if gilt yields remain elevated.
Finally, this budget comes at a time of mounting political risk for the Government, especially the PM and Chancellor. Public support has fallen sharply (currently polling at 18%, down from 34% at the mid-2024 election), and discontent among Labour MPs has been rising. Even with a sizeable majority, a poor reception for this budget, weak local election results in May and a fear of further tax rises could trigger a major rebellion.
If political instability escalates, the possibility of an early general election cannot be ruled out. This would likely increase economic uncertainty for businesses, potentially delaying investment decisions and impacting confidence in the UK market.
What will be the impact on UK businesses?
The direct impact on companies is limited as the budget primarily raises taxes on individuals and the National Minimum Wage rise (4.1%) is smaller than in recent years.
However, the cumulative effect of a higher business rate multiplier and continued wage growth will increase costs from April 2026. This will hit retail and hospitality hardest because current business rate relief is being phased out and replaced with a less generous scheme.
We’re already seeing a rise in corporate insolvencies – up 3.9% year-on-year in May–October, compared with a 0.4% decline in January–April. The increase has been most pronounced in low-paid sectors such as retail, leisure and hospitality. Business sentiment has also deteriorated although this may improve as interest rates gradually come down in 2026. In particular, the construction sector should benefit from lower interest rates, along with the Planning and Infrastructure Bill, (currently in final stages) which will activity boost activity in 2026.
Meanwhile consumers should have more spending money in their pockets (in the short term, at least) boosted by some of the supportive measures in the budget such as freezing regulated rail fares and prescription fees and removing levies from energy bills.
What’s your overall assessment?
The budget appears designed primarily to meet the Government’s fiscal rules and satisfy Labour MPs rather than deliver major policy shifts such as wholesale reform of the tax system. However, the financial position remains fragile because its projected headroom is highly contingent on politically sensitive, back-loaded measures. The planned increase in NICs on salary-sacrificed pension contributions, for example, would come in just before the next general election which raises questions about its credibility. There’s also uncertainty over the revenue that will be generated by ‘behaviour taxes’ like levies on online gambling.
This raises the possibility of further tax rises or spending restraint in 2026, increasing political risk and market volatility.
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