Markets braced for a nail-biter United Kingdom Budget on Wednesday as investors wait to see how Chancellor Rachel Reeves plans to fill a multibillion-pound fiscal gap without spooking gilt traders.
While the Autumn Budget is always a big moment for markets, this year the stakes feel unusually high with investors fixated on Reeves’ tax and spending decisions, after she boxed herself in with strict fiscal rules she set last year.
These rules, which she has vowed not to tamper with, require everyday government spending to be covered by tax revenues and for public debt to fall as a share of gross domestic product (GDP) by 2029–30.
However, given that higher borrowing costs, slower growth and reversed welfare cuts have created a £20–35 billion hole in the public finances, most analysts think tax rises are virtually inevitable.
At face value, Reeves appears to be confronted with a no-win outcome.
Assuming Reeves reneges on the rules she created, gilt markets – aka long-term government bonds issued by the UK government to borrow money for public spending - could revolt.
On the other hand, any hint of fiscal impropriety risks ratcheting UK’s borrowing costs and only further igniting investor suspicions over the government's control of the books.
Faced with this dilemma, strategists expect Reeves to play within the framework she created— and deploy tax increases to remain firmly inside it.
However, analysts have also been quick to warn that simply complying with her own self-imposed rules won't be enough to appease markets.
What they’re calling for is a credible plan that goes beyond tax hikes: evidence of spending restraint, support for economic growth and a path that keeps inflation falling so the Bank of England can continue cutting rates, possibly as soon as December.
In a blunt assessment, Nomura economists noted that markets won’t tolerate wavering on the rules, describing them as the “ultimate judge” of the UK’s fiscal sustainability.
Pantheon Macroeconomics expects gilt yields to edge higher after the Budget, warning that the reality of Reeves’ choices may “disappoint expectations”.
Ahead of Wednesday’s UK Budget, the economic forecaster has already lifted its 2025 yield expectations, citing political instability and policy uncertainty.
As of Monday, 10-year gilt yields hovered around 4.55%, while 30-year yields were near 5.36%.
These numbers are understood to reflect heightened nerves — not just about Reeves’ decisions but also about what the Office for Budget Responsibility will say in its fresh economic forecasts released the same day.
While market speculation about possible income-tax rises briefly rattled investors, gilt yields jumped again when Reeves appeared to back away from that idea.
Meanwhile, the message resonating from investors is unambiguous: any surprise U-turns on revenue-raising will be punished.
Unpredictability has been a defining theme in 2025, with analysts citing the constant flow of leaks and trial balloons about potential tax changes for spooking businesses and markets.
Some economists argue that excessive government “kite-flying” to test reactions has compromised stability.
Meanwhile, strategists like Matthew Ryan at Ebury see the Budget as a way for Reeves to reset the narrative.
He warns that a tax-heavy plan without a clear growth strategy would be bearish for sterling and gilts, but a credible, while a balanced package could calm nerves.
David Aikman of the National Institute of Economic and Social Research echoed a similar sentiment, stressing that investors mainly want reassurance that the UK’s fiscal path is stable, not one that requires repeated policy resets every few months.
He also cautioned that measures loaded into the far end of the forecast period, close to the 2029 election, may raise questions about credibility.
Despite the tense run-up, Aikman believes Reeves still has room to present a coherent, pro-growth plan on Wednesday.
A clear, consistent Budget, adds Aikman could still restore confidence after weeks of uncertainty.
