The countdown has begun, only 2 months left until the next pivotal moment for the UK public finances. The annual autumnal check on central government’s finances and adherence to fiscal rules fast approaches, with a familiar set of concerns. A succession of weak economic indicators highlights the challenging backdrop facing the British economy. Alongside that, government borrowing has run ahead of Labour’s plan and the room to manoeuvre is limited by the fiscal rules and manifesto pledges.
Markets will likely punish any hint of indiscipline and will reward a credible path that sets the government’s finances on a sustainable path.
Inflation has fallen a long way from its peak but remains stubbornly above the 2% target (August CPI 3.8%), particularly on the services side and primarily due to government policy. Growth is limited and uneven, with consumers still adjusting to higher living costs and rising effective mortgage rates. The labour market has cooled , although pay growth is still firm enough to keep services inflation sticky. Long gilt yields are elevated , but the Bank of England maintains that underlying price pressures are easing, the economy is expanding slowly, and financial conditions remain restrictive enough to bite.
The two key Fiscal Rules are:
1. The government must ensure that day-to-day spending is fully funded by revenues within a five-year rolling horizon, meaning that borrowing can only be used to finance investment rather than routine expenditure.
2. Public sector net debt (excluding the Bank of England) must be shown to fall as a share of GDP by the end of the OBR’s forecast period.
Public sector borrowing year to date has overshot the March profile. Public sector net debt sits around 95% as a share of GDP. The current budget remains in deficit and the Chancellor’s headroom against the two core rules is thin. In March the margin was roughly £10bn on the current budget rule and around £15bn on the debt falling rule. Since then weaker receipts and higher debt interest have eroded that buffer. The Budget arithmetic therefore begins tight and will tighten further if the OBR revises down growth or productivity.
The OBR will publish its forecast alongside the Budget on 26th November. That forecast is the yardstick against which the Chancellor’s headroom and the fiscal rules will be judged. It incorporates the latest economic data available before the event and then assesses the policy measures announced on the day. The timing matters because it means the market will see, in one sitting, both the policy package and an independent assessment of what that package does to growth, borrowing, debt interest and the path for debt to GDP. If the OBR trims receipts or raises debt interest relative to March, tougher decisions will need to be made to stay within the rules. If the OBR is a touch more optimistic on supply potential and growth, the Chancellor may gain a little room to support priority services while keeping credibility intact.
Given the Labour manifesto pledges to not increase the three main taxes, income tax, National Insurance and VAT, the Chancellor is once again stuck trying to raise large amounts of money, from a shrinking pool of options, prompting a serious questions whether she will keep those manifesto pledges. The following list of potential taxation changes are not in any particular order, and detail is currently very limited.
The Chancellor faces a delicate balance, a tight fiscal envelope, stubborn inflation, and markets watching for any sign of drift. The choice is not just which taxes to tweak or which reliefs to trim, but whether credibility is reinforced or undermined in the process. For organisations, the stakes are clear. If November proves to be steady, with fiscal rules protected and supply-side reforms advanced, borrowing costs may ease into 2026, but this may come somewhat at the cost of growth, income and profitability as higher taxes bite. If discipline falters, borrowing costs will rise alongside possibly longer-term implications for business activity and growth as confidence falters. The question now is simple: will this Budget steady the foundations, or shake confidence further? Adherence to manifesto pledges could be the determining factor.
For many organistations, the prudent approach is to preserve liquidity, stagger funding, and keep optionality in capital plans until the settlement and policy signals are clear.
Related Insights
Key Elements of an Effective Treasury Management Strategy
Have we really entered a post-pandemic era of higher policy rates?