The UK’s Autumn Statement delivers modest fiscal tightening without restoring confidence—raising taxes, trimming growth, and leaving markets uneasy about debt sustainability.
On November 26, the UK government issued the Autumn Statement (often called the Autumn Budget). Moderately contractionary and inflation-neutral, the budget adjustment does not materially affect the monetary policy path and, hence, short-term markets. However, lingering worries about fiscal sustainability are weighing on risk assets and the pound.
The Autumn Statement was contentious. In the end, the government delivered a moderate fiscal tightening, driven mainly by an increase of £26 billion in taxes. As expected, it extended the freeze on income tax thresholds and imposed limits on salary sacrifice schemes, but otherwise avoided broad-based sources, drawing instead from a hodgepodge of small pots: gambling and expensive homes, among others.
One surprise was the state of the budget. Rather than having to fill a fiscal hole—figures of up to £50 billion had been floated—the government was only facing a partially depleted buffer compared to the fiscal rules: down to £4 billion ahead of the budget from £10 billion in the spring. With the new measures, the buffer stands at £22 billion.
1
Stability Rule
Stability Rule
Day-to-day spending must be balanced or in surplus by 2029–30; borrowing allowed only for investment.
2
Investment Rule
Investment Rule
Public sector net financial liabilities must fall as a share of GDP between 2028–29 and 2029–30.
3
Welfare Rule
Welfare Rule
Certain welfare spending capped at £194.5 billion by 2029–30, with a 5% overspend margin.
Source: Institute for Government, as of November 19, 2025
We expect the budget to create a slight headwind to short-term growth by way of weaker household consumption and subdued business investments. In particular, we expect growth to be cut by 0.2% over the next two years.
The impact on inflation is likely modest, and any budget-related reduction in inflation will be seen by the Bank of England (BoE) as temporary. As such, the impact on the monetary policy path is minimal. In other words, the BoE will continue its cutting cycle. We expect one rate cut in December and two more in H1 2026. Policy rates are likely to settle at 3.25%.
One thing the budget could have done better was address the lingering investor concerns about fiscal sustainability. The problem is well-known—a debt load that is high (debt-to-GDP>100%) and sticky (Figure 1). Managing the issue means the government must balance the interests of voters, businesses, investors, and MPs—a challenging task.
Indeed, that there was any tax increase at all is a sign of continuing fiscal commitment. This is good news. However, at £22 billion, the new fiscal space still feels too narrow, particularly since the Office for Budget Responsibility’s productivity forecasts are still relatively optimistic. It is easy to see how the government could face another fiscal squeeze next year.
The country’s electoral calendar makes the situation more worrisome. The next electoral test will come in May 2026, when the United Kingdom (UK) holds local and key regional elections (in Scotland and Wales).
Current polling suggests turbulence: Labour approval ratings are low; Tories are struggling for relevance; and Reform UK is in the lead. The May election will, therefore, pressure-test a range of future political scenarios, each of which has implications for the country’s economic and fiscal policies. The likely result is market volatility heading into the election.
The election result will matter as well. With general elections at least three to four years away, how well Labour does will determine how secure PM Keir Starmer and Chancellor Rachel Reeves are in their jobs, or if they hold on to them at all. Unless Labour outperforms in the elections, the likely shift of fiscal policy will be to the left, implying fiscal loosening.
For markets, fresh concerns over fiscal sustainability overwhelm the ongoing positive impulse from falling rates.
Pound: In currency markets, the pressure on the pound has increased. The medium-term growth impulse is weaker. Fiscal concerns prompt capital flight. Indeed, for the UK, this is a particularly salient issue, given its high current account deficit and, hence, high dependency on overseas investors (Figure 2). Furthermore, interest rates are falling, which reduces the pound’s yield appeal. In short, the pound has no positive pillars to stand on and is likely to depreciate.
Bonds: In fixed income, we likely would see curve steepening. On the one hand, falling policy rates are a positive impulse; on the other, fiscal sustainability concerns introduce a risk premium that pushes yields higher. The long end of the curve will bear the brunt of this, as it is most sensitive to debt and inflation fears, resulting in a steeper curve.
Equities: The weaker pound provides a modest tailwind. However, our outlook is bearish. The negative impact of the budget on growth implies a weaker revenue environment for companies, particularly those with domestically focused earnings. The fiscal risk premium embedded in bond yields is a further headwind, as it can spill over into both earnings (via higher borrowing costs) and equity valuations. At the sectoral level, cyclicals may be hit by the growth slowdown. Bond-proxy sectors (such as utilities and REITs) may get no relief because long-term yields are rising.
The Autumn budget was not as bad as feared. However, it still presents a “worst of both worlds” scenario: the growth drag of fiscal tightening without a material credibility gain of fiscal sustainability. The result is a “bad fiscal” dynamic—a steeper curve and slower growth—that outweighs “good monetary” news: falling policy rates. Consequently, this leads us to a cautious outlook with a negative bias on risk assets and a bearish view on the pound.
