SORBUS Spotlight: The Budget in 8 posts
Given how much of this year’s budget had been pre-briefed to the media or trailed in advance, there were few surprises in the Chancellor’s speech. Especially as the Office for Budget Responsibility (OBR) managed to somehow publish its documents – which contained essentially the whole budget – two hours early. There was something of an illicit thrill for longtime British fiscal policy watchers in reading the details before the chancellor was speaking in the chamber. And it certainly made analysing the details much easier on the day.
This month’s Spotlight runs through the big picture in 8 OBR charts.
Growth has been better in the short run, what comes next looks worse.
source: SORBUS PARTNERS LLP, Office for Budget Responsibility (OBR) (data as at: 26/11/25)
Compared to the forecasts made in March (the yellow lines above) the economy, despite all of the doom and gloom has outperformed expectations – which perhaps says more about how rock-bottom expectations were back in the Spring. Growth this year is now expected to be closer to 1.5% than the Spring forecast of under 1%.
That, however, tells us more about the recent past than the future. The OBR, whilst recognising that they may have been too pessimistic in the very short term, were overly optimistic about the medium term. The big picture economic forecast is a notching up of the expected growth rate in 2025 but downgrades to 2026, 2027, 2028 and 2029.
Indeed, as the Treasury have been trailing since September, the big news on the economic front was a downgrade to the OBR’s view on productivity growth in the medium to longer term. They now expect growth in the later 2020s and early 2030s to more closely resemble the growth rates of the 2010s and early 2020s – at around 1.5% per annum – rather than somehow returning towards the 2.5%+ experienced before the financial crisis.
The Forecast changes were not as bad as expected.
source: SORBUS PARTNERS LLP, Office for Budget Responsibility (OBR) (data as at: 26/11/25)
But despite that major downgrade in medium term growth forecasts, the overall impact on the public finances was nowhere near as bad as had been prebriefed. The yellow line above shows the forecast as of March, the dotted line shows the forecast after making the necessary adjustments because of a changed economic forecast. The solid blue line then takes account of policy changes at the budget.
The productivity downgrade was mostly offset by upgrades to expected inflation and wage growth in the short term which, whilst not necessarily great news for the economy, do tend to help the government’s coffers. Overall growth is expected to be weaker in 2026-2029 (after a slightly stronger 2025), but that lower growth will be more tax rich than once forecast.
That meant the overall hole to be filled was less than expected and yet the Chancellor still chose to do a large package of tax rises – around £26bn annually by 2030, on top of last year’s £40bn package.
About half of that additional tax will be used to fund more spending – mostly welfare related – and half was earmarked to build up more space – so-called headroom – relative to her target to get the current budget (excluding capital spending) into balance over the medium term.
There is more headroom, but not as much as hoped.
source: SORBUS PARTNERS LLP, Office for Budget Responsibility (OBR) (data as at: 26/11/25)
The Chancellor made a big deal of more than doubling the amount of fiscal headroom from under £10bn to more £20bn. And yet, whilst that may be a sensible move, the overall amount of headroom still looks low.
In her first two fiscal events (last year’s budget and this year’s spring statement) the Chancellor, like Jeremy Hunt before her, has very little room for error. This was a major problem as even relatively small changes in the economic forecasts could mean that suddenly there was a last-minute scramble to change policy to meet the targets – as happened at this fiscal event and in the Spring.
More headroom is therefore welcome – it means fiscal policy should be more stable and uncertainty reduced. But headroom remains low relative to the average of the past fifteen years and the OBR judge that there is just a 58% chance that the targets will be hit.
That is to say the odds of avoiding a similar scramble, more changes in fiscal policy and higher uncertainty in the future are little better than a coin toss.
What is clear from the measures announced is that the Chancellor drew up this budget with two primary audiences in mind.
The first audience was markets.
source: SORBUS PARTNERS LLP, Office for Budget Responsibility (OBR) (data as at: 26/11/25)
The first target audience was gilt investors. As the chart above makes clear, gilts sat in the middle of the advanced economy pack – in terms of yield and perceived risk – until 2022. After the inflation shock of that year – the Truss mini-budget fallout – yields rose relative to other advanced economies.
Over the last year, yields have risen to be amongst the highest of any rich country and well above the G7 average. With around one in ten pounds that the government spends going on debt interest, the Chancellor was keen to signal to debt investors that fiscal consolidation is ongoing. Doubling the headroom has been, initially at least, well received by investors.
The second audience was Labour backbenchers.
The other key audience for the Chancellor seemed to be restless Labour backbenchers. With the party languishing below in the polls and both Rachel Reeves and Keir Starmer’s positions under threat, the budget had plenty of red meat for backbenchers. After U-turning, in the face of Labour opposition on cuts to disability benefits earlier this year, there was no more talk of cutting back on welfare.
The ending of the two-child cap on child benefit elicited loud cheers from the Labour benches, as did a new levy gambling firms and a so-called mansion tax on properties valued at more than two million pounds.
The heavy lifting in terms of tax came from freezing the various thresholds in cash terms. The end result, as the chart below makes clear (although note the zoomed in axis for recent years) will be the tax burden rising to its highest level on record by 2030.
source: SORBUS PARTNERS LLP, Office for Budget Responsibility (OBR) (data as at: 26/11/25)
The first risk is backloading.
source: SORBUS PARTNERS LLP, Office for Budget Responsibility (OBR) (data as at: 26/11/25)
Any plan aimed simultaneously pleasing hard-nosed bond investors and left leaning Labour MPs must have risks.
The first, and most obvious one, in this budget was the back loading of much of the pain. In the OBR chart, comparing the white and black diamonds shows how forecasts changed since March (the pre-measure change in public sector net borrowing) and how policy reacted.
The takeaway is that the Chancellor has actually eased fiscal policy – mostly with extra spending – in the coming two years and pledged to tighten in 2028-2030.
Given that an election is due in 2028 or 2029, a sudden reversal in policy around that time seems unlikely.
The biggest risk to the fiscal forecasts is surely some backsliding as an election approaches, pledging to be generous in the short term but more austere in three or four years’ time is easy. Following through on that is much tougher.
The second risk is living standards.
source: SORBUS PARTNERS LLP, Office for Budget Responsibility (OBR) (data as at: 26/11/25)
The second obvious risk is that whilst the budget seemed to have a lot for Labour backbenchers and a fair amount for the bond market, it had very little for anyone else – including the majority of households and firms.
The outlook for living standards, as shown above, remains grim and in fact slightly worse post-budget than pre as higher tax receipts drag down disposable incomes further.
Even if the Chancellor did do enough to smooth the feelings of gilt investors and Labour MPs for a few months – and so held back a markets crisis or a Labour leadership coup – there was simply not very much for voters.
In many ways this felt like a budget aimed at short-term political survival rather than at either the long term good of the economy or an agenda to win the next general election.
Or it could just all go wrong.
source: SORBUS PARTNERS LLP, Office for Budget Responsibility (OBR) (data as at: 26/11/25)
And there is still plenty that could go wrong. One does not even need to imagine some sort of economic disaster to see the targets being missed. All that has to happen is that things have to stay as they are.
The big downgrade from the OBR was simply taking their productivity forecast (the yellow line above) down a notch (to the blue line). But even after that downgrade, they still expect a large pick up in growth from the average rates seen over the last fifteen years. That may prove to be, once more, too optimistic.
The big picture is that British growth remains sluggish, living standards remain squeezed and government debt remains high. The one and done approach to fiscal tightening has already become a two and done. It is not hard to see how economic shocks could mean the Chancellor is not done increasing taxation yet.