The Chancellor faced a high bar to restore credibility today. The early release of OBR numbers rattled markets, but well-flagged measures and a bigger-than-expected fiscal buffer steadied the initial reaction. Beneath the surface, however, the budget pushes most of the heavy lifting into later years – leaving the UK with a tough mix of weak growth, sticky inflation pressures and even more political uncertainty.
The credibility gap remains. Spending is now set to rise through FY2027/28 rather than contract, driven by welfare reforms and higher departmental costs. Revenues fall in the near term, with the next meaningful tax uplift only arriving after the election. That leaves the UK leaning more heavily on back-loaded measures and future political choices.
The economic backdrop isn’t getting easier either. The OBR now sees inflation around 0.5 percentage points higher over the next two years and weaker productivity ahead. That forces the Bank of England into a delicate balancing act. With a negative fiscal impulse of ~1.5% projected through 2027/28, we still expect Bailey to cut again in December and to take rates down towards a 3.25% terminal rate through 2026. The impetus to ease more aggressively has faded, however, with minimal fiscal-led growth implications in coming years.
Disinflation in services and a weakening labour market gives the BoE room to ease, but in contrast to our earlier view, UK yields will likely take longer to outperform peers. The gilt-Treasury spread near 50 bps reflects a persistent risk premium and today’s budget does little to shake that in the near-term. Years of inconsistent fiscal signalling have left a scar in UK term premium, and this statement won’t fully repair it. We are revising our year-end 10y gilt forecast to 4.4% from 4.2%.
We remain constructive on gilts, but the anticipated catalyst from today’s event failed to materialise, so we expect it will take longer to shake the risk premium from long-end gilts.
A small reduction in this year’s gilt remit helps at the margin. But the bigger challenge is unchanged: the UK still lacks a front-loaded, credible consolidation path. This was a high-credibility test – and the outcome falls short.
By Laura Cooper, Head of Macro Strategy at Nuveen
