Chancellor Rachel Reeves’s second Budget is “a political Frankenstein”, according to Peel Hunt chief economist Kallum Pickering.
Today’s Budget represents a patchwork of token and, in many instances, measures that are more political compromises than anything else, Pickering argued.
“The Budget does little to seriously tackle sluggish growth, low confidence or a bloated public sector financed by a distortive tax system,” he said.
“The new measures leave the overall fiscal position broadly neutral by the end of the five-year forecast – but with substantial front-end easing and back-loaded tightening.”
While some measures could reduce inflation pressures marginally, the heavy reliance on tax rises and temporary relief packages leaves many structural issues unresolved.
Financial markets showed little reaction to Reeves’ Budget, reflecting a sense that while the measures announced were not revolutionary, they avoided making the UK’s fiscal position materially worse. The FTSE 100 was up 0.7% two hours after the Budget.
Analysts broadly welcomed the attempt to shore up credibility, particularly in the gilt market, but noted that the Budget does little to unleash growth or resolve underlying fiscal pressures.
Matthew Amis, investment director at Aberdeen Investments, said: “This was never going to be a budget for growth or to release animal spirits, this was a budget to attempt to build credibility. Credibility in the gilt market and credibility within the Labour party.
“Is it the credibility builder we were looking for? No, but is this a budget to cause a gilt market storm? Again no. The limited gilt market reaction so far is probably fair. We move on.”
Amis added that while inflation-busting measures were welcome and gilt supply remains steady, fiscal consolidation is back-loaded and the Budget does not materially accelerate the Bank of England’s interest rate cuts.
Income tax thresholds frozen until 2031
The chancellor confirmed the continuation of the freeze on income tax thresholds, a move that gradually pulls more workers and pensioners into higher tax bands.
Aqib Merchant, fiduciary manager at Russell Investments, said this “reduces disposable income, chips away at the incentive to save and brings more retirement income into taxation”.
Also, the back-loaded nature of these measures combined with other policy decisions leaves headroom vulnerable to a range of economic risks, according to Neil Mehta, portfolio manager at RBC BlueBay Asset Management.
“If nominal GDP undershoots by 0.3 percentage points each year over the forecast period, the headroom is wiped out. If tax intake is reduced 1 percentage points each year over the forecast period, the headroom is wiped out. If gilt yields rise 1 percentage points each year over the forecast period, the headroom is nearly wiped out,” he said.
“The risk the government comes back in a year asking for yet more tax rises remains high and will keep markets second-guessing for the foreseeable future.”
Cash ISA reform
The Budget caps the annual cash ISA limit to £12,000, a move that will cause concern for many given the popularity of the vehicle. Two-fifths of Moneybox Cash ISA customers deposited more than £12,000 in the 2024/2025 financial year, indicating that this reduction will impact a substantial proportion of savers, as Brian Byrnes, head of personal finance at the firm, noted.
The cut to the cash ISA allowance is not transformational, as most people will simply redirect savings into other vehicles, said Russell Investments' Merchant.
“The suggestion that this will significantly steer capital into UK assets feels optimistic as UK investments form only a very small proportion of most multi-asset /equity funds available for individuals to invest in.”
Salary sacrifice capped at £2,000
The Budget limits National Insurance advantages for salary sacrifice pensions to the first £2,000, a move that will affect mid-career earners and those already under pressure to save for retirement.
James Floyd, managing director of Alltrust Services, warned: “The government’s cut to salary sacrifice relief confirms a move away from supporting private retirement saving and towards short-term fiscal balancing. Stripping away National Insurance efficiency removes the core advantage of salary sacrifice, narrowing the gap with SIPP [self-invested private pensions] funding and shifting more responsibility back onto individuals. Reducing the ability to save efficiently, limiting flexibility and diluting incentives effectively hard-wires later retirement into the economy.”
Merchant added: “This affects one of the simplest and most effective ways many workers build their pension pots and it will influence behaviour, particularly for mid-career earners who are already under pressure to save more for retirement. Taken together, these changes do not threaten market stability, but they do place additional strain on savers at a time when long-term adequacy should be the priority.”
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