The UK’s 2025 Budget: Stability Amidst Uncertainty?

At last, it’s here! After what feels like a lifetime of teasers, leaks, and scandals it’s finally here! It’s hard to believe that it has only been 12 weeks since the Chancellor, Rachel Reeves, confirmed the date of her second budget. One reason for that is that about 6 budgets worth of tax rises, tax cuts, policy initiatives, and regulatory changes have been crammed into a 3-month window. For weeks the government laid the groundwork for an increase in income taxes, making a complete U-turn on a key manifesto pledge. This was well-received by markets. UK 10-year gilt yields reduced from c.4.7% at the start of October to c.4.38% a month later. The abrupt U-turn on the U-turn (an O-turn?) sent yields back towards 4.6%. While there are myriad factors that drive gilt yields, since the Truss/Kwarteng mini-budget debacle it does appear that the UK is paying what has somewhat uncharitably described as a ‘moron premium’. Nobody ‘needs’ to own the UK, and if the government is perceived as being unrealistic about longer-term fiscal challenges, then it shouldn’t be surprised about having to pay more on its borrowings. 

None of this is a recipe for stability, and we’ve seen this reflected in the trading statements released by a number of companies exposed to the UK economy.  Housebuilders have seen a softening in the market since the summer as consumer confidence has been affected by the uncertainty relating to the Budget. Similarly, retail stocks have reported increase customer caution in recent months. But now that we have clarity, how should the 2025 Budget be viewed? 

In our view, it’s largely a complete and utter ‘meh’. There was nothing hugely surprising in either a positive or negative sense, which given the prolonged build-up shouldn’t itself be that surprising. Some of our hoped-for changes such as an early end to the Energy Profits Levy (EPL) didn’t materialise and others, such as the abolition of gaming duty on bingo while increasing the rate on other forms of gambling, appear nakedly political. Overall, better than expected OBR forecasts have allowed the government to kick the can down the road. But it does feel like an opportunity lost. There was the potential to engage the electorate in a discussion around the longer-term merits of allocating capital away from more productive segments of the economy to the less productive ones, as well as the broader issue of fiscal sustainability. While an increase in the headline rate income tax may have proven unpopular in the short-term, it would have least demonstrated that the government is prepared to make those sorts of choices and confront its own backbenchers. The market is pricing in 3-4 further rate cuts over the next 12 months, we believe that an increase in income tax would have given the Bank of England cover to accelerate.  

On the positive side, though, what it does provide is a market-clearing event. While rational minds can disagree about whether the ‘smorgasbord’ budget will work, there is at least now some certainty. And for all its political shortcomings, the UK really isn’t in that bad a situation. Corporate and household balance sheets remain healthy, and they will benefit from those rate cuts coming through over the next year. Economic growth, while nothing to get particularly excited about, is still forecast by the IMF to be higher than that seen in the Eurozone during 2026[1]. While inflation has been elevated in the UK during 2025, this largely reflects the previous year’s policy errors, and we see no reason why it should prove structural. If, and we concede it’s a big ‘if’, the government can stop shooting itself in the foot, a period of relative political and economic stability should help restore investor confidence. In that environment, we’d expect the valuation gap between the domestically focused FTSE 250 and FTSE 100 to narrow. 

Improving sentiment towards the UK should benefit domestically focused cyclical sectors, like the housebuilders and retailers. Marks and Spencer, a portfolio holding, has underperformed this year as it dealt with the prolonged impact of April’s cyberattack and, more recently, concerns about the health of the UK consumer. Despite the operational issues during the year, the group continued to increase market share in Food and make continued progress in improving the style and quality perceptions of it’s Fashion, Home & Beauty business. A less noisy economic environment can only be beneficial for the stock.  

Rachel Reeves will hope that her most ‘political’ of budgets will see both herself and her boss through to the next election, although the likelihood of that does appear finely balanced. After all parliamentary backbenchers are akin to badly-behaved toddlers, without discipline they will keep coming back for more.

[1] Source: IMF World Econ Outlook Oct’25

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