UK Budget 2025: A short-term fix for long-term challenges

Richard Flax, Chief Investment Officer at Moneyfarm, looks at how the 2025 Budget steadies things for now but doesn’t deal with the UK’s bigger, long-term financial challenges, leaving the harder choices for later.

Finally, the Chancellor announced the latest UK government budget. The process had gone on for so long that any announcement might have come as a bit of a relief, regardless of what it contained. We wanted to think about the budget and its implications for portfolios.

The UK, in common with much of the developed world, faces a bunch of fiscal challenges. As the chart below shows – the government’s role in the economy is quite large. The chart shows how UK government spending and revenues have evolved as a share of GDP since the 1940s. Expenditure (blue) has almost always run ahead of revenues (yellow), widening sharply during major crises. Both lines are now at levels that are high compared with most of the past forty years, and the recent trend suggests they are likely to move higher rather than lower in the years ahead.

At the same time, we also know that the tax base is pretty narrow. According to a House of Commons report from August 2025, the top 1% of taxpayers earn 13% of total income and pay close to 29% of income tax. 

Across the Developed World, demographics represent a challenge. Aging populations and an increasingly hostile stance on immigration raise questions about how governments will afford to provide services to their citizens.

Cutting government spending is no easy task. The chart below shows total managed spending for the UK government from 1999 to 2025 (in billions of pounds). It shows a pretty steady increase – in nominal terms – during the period. 

Even during the period of “Austerity” between 2010 and 2019, total government spending continued to grow in nominal terms – albeit at a slower pace. It also rose slightly during that period when adjusted for inflation. If Cameron and Osborne couldn’t cut total government spending after the Global Financial Crisis, it’s tough to imagine that Starmer and Reeves will be willing or able to manage it before the next election.

That brings us to economic growth. The Chancellor has rightly highlighted that growth is the best, maybe the only, way to square this circle and generate enough tax revenues to finance the government’s long-term spending plans. Unfortunately, accelerating economic growth through policy choices isn’t easy – or everyone would do it. 

Enough of all that – what about the budget? Without rehashing the details, in the short-term, the Chancellor probably did enough. Raise spending enough to satisfy Labour MPs. Raise taxes enough to placate bond investors, at least for now. Mis-match the timing so spending shows up now, but tax increases really only kick in during 2027 and 2028. It limits the immediate outrage of tax payers but still keeps the OBR onside, since they’re more focused on 2030/31. Overall debt to GDP is forecast to stay more or less flat during the period. 

None of this really addresses the long-term challenges outlined above. There wasn’t much here to encourage economic growth. Tinkering with VCT and EIS schemes likely won’t move the needle. And the choice of tax increases was really driven by the need not to renege on some headline manifesto promises rather than any rigorous analysis of the most effective way to improve the fiscal accounts. So, the Chancellor has firmly kicked the can down the road, but without causing any immediate wobbles in government bond yields. Given all of the noise over the past few months, that probably constitutes a win. But the UK, along with many of its peers, faces long-term fiscal challenges and we didn’t hear too much about that this week. Maybe next year.

In terms of portfolio positioning, we continue to think that UK yields look attractive for domestic investors. We remain biased towards shorter-dated bonds, given the long-term challenges that we’ve highlighted. But in this case, stronger economic growth would likely be a benefit for investors in bonds as well as equities – and that’s still proving elusive.