UK investors breathed a sigh of relief on Wednesday, as the Chancellor Rachel Reeves’ tax-raising budget landed with far less drama than many in the markets had feared.
Reeves unveiled more than £26 billion in fresh tax increases, aimed at shoring up the public finances and giving herself greater space to meet her deficit-reduction rules.
While the Office for Budget Responsibility (OBR) had mistakenly published its forecasts early, the figures still set the tone: Reeves now has almost £22 billion of headroom in a few years’ time—more than double what had been expected.
Markets welcomed that sense of renewed fiscal credibility, with a surge in long-dated UK government bonds sending 30-year gilt yields down by the most since April.
The rally spilled across the curve, pulling down two- and five-year yields as well.
With the Debt Management Office cancelling several auctions, investors anticipated less supply of long-maturity debt, adding momentum to the move.
Sterling also jumped, putting in its strongest week since August.
“It could have been a lot worse,” one investment officer summed it up.
Banks quickly shifted their trading calls, turning more bullish on both the pound and gilts, and even JPMorgan’s Jamie Dimon praised Reeves’ focus on growth-friendly measures.
However, while markets cheered, savers and wealthier households weren’t so happy.
Official forecasters expect Reeves’ budget movements – which leaned heavily on tax rises aimed at workers, pension contributors and investors - to lift Britain’s tax burden to a fresh post-war high by the end of the decade.
It’s understood that more people will also be pushed into higher tax brackets as overall tax receipts climb towards £1.5 trillion.
Among Reeves’ most controversial changes were cuts to pension perks.
Salary-sacrifice contributions above £2,000 a year will lose their tax advantages from 2029, a shift expected to raise almost £5 billion and hit top earners hardest.
Wealth managers were quick to warn that the change could discourage saving; however, pensions experts suggested that the long lead time could give people opportunities to restructure their pay to soften the blow.
Dividend, property and savings taxes will also rise, bringing in a further £2.1 billion.
As part of a push to steer savers into the stock market, the tax-free ISA allowance for under-65s will fall from £20,000 to £12,000 in 2027.
As a result, shares in investment platforms and asset managers were pushed higher on the day.
A new levy on homes worth more than £2 million—quickly dubbed a mansion tax—will contribute a more modest £400 million later in the decade, and Reeves confirmed a mileage-based charge on electric vehicles while keeping fuel duty frozen.
However, despite the removal of the two-child cap on welfare support and other cost-of-living interventions means public spending is still set to rise.
While anti-poverty groups welcomed those steps, they stressed that the country’s safety nets remain thin and essential costs still too high.
Meantime, OBR delivered a less rosy economic outlook.
Pulled down by weak productivity and the lingering drag from Brexit, growth is now expected to average 1.5% over the next five years, while living standards are projected to grow only minimally, with higher taxes taking their toll.
While Reeves insists she will outperform the forecasts again, economists cautioned that many of the toughest tax rises come close enough to the 2029 election to raise doubts about how firmly they will be delivered.
Overall, investors appear reassured by Budget measures: gilt yields fell, the pound climbed, and UK stocks rallied, with the FTSE 100 rising nearly 1%.
Nevertheless, some analysts warned that the chancellor may need to return for further increases next year.
Meanwhile, markets have given Reeves something she badly needed—breathing space, and the benefit of the doubt.
