Rachel Reeves’s second budget was framed around a central objective: reassuring financial markets of the government’s ability to meet its fiscal rule, which requires day-to-day spending to be funded entirely by revenues by 2029–30. Early market reactions suggest that the Budget has met its intended aim.

The Chancellor unveiled a significantly larger-than-expected fiscal headroom (rising from £9.9 billion to £21.7 billion), providing a more comfortable buffer to shield the UK’s public finances from future adverse shocks. Investors reacted positively, viewing the additional room for manoeuvre as a sign of strengthened fiscal credibility.

The gilt market had already begun to rally after the Office for Budget Responsibility inadvertently disclosed the figures ahead of the formal announcement. The boost in confidence over the UK’s fiscal trajectory pushed bond prices higher, reducing their yields. By the end of Budget day, the 10-year gilt yield stood at 4.43%, down 10 basis points from the pre-announcement close of 4.53% and at its lowest level in two weeks.

Current projections show the budget deficit falling to 1.9% of GDP by 2030, from 4.5% of GDP in the current year. That would stabilise the debt ratio well below 100% of GDP.

Overall, the policy mix leans heavily toward revenue-raising measures, reflecting the Chancellor’s limited political capital within her own party to pursue meaningful spending cuts.

The centrepiece of Rachel Reeves’s Budget is the freezing of income tax thresholds for an additional three years, which is expected to raise £13 billion by 2030–31. As wages rise with inflation, this measure pushes more workers into higher tax brackets without any formal increase in tax rates — a form of “bracket creep” that generates additional government revenue without the political cost of legislating explicit rate rises.

A second significant measure limits tax advantages on salary-sacrifice schemes from April 2029, expected to generate an additional £5 billion in 2029–30. Although the burden ostensibly falls on employers through higher National Insurance contributions, employees are likely to bear the real cost through lower wages and reduced pension contributions.

Reeves also introduced levies on electric vehicles (£1.4 billion), increased taxes on the gambling industry (£1.1 billion), and a council tax surcharge on homes valued above £2 million (£400 million in 2029–30).

Cumulatively, these measures are expected to push the total tax burden to a record high of 38% by the end of the parliamentary term.

The higher revenues will partly fund nearly £10 billion in additional welfare spending, including over £3 billion to abolish the two-child benefit cap. With strong backing from Labour MPs, this change will provide around half a million families on universal credit with an average annual gain of more than £5,000 each.

With no inflationary pressures introduced in the Budget, the Bank of England is positioned to ease policy. At its next meeting, scheduled for 18 December 2025, the Monetary Policy Committee is expected to cut the Bank Rate by 25 basis points in response to signs of a weakening labour market.

Francesco Fusari is a Lecturer in Macroeconomics at Newcastle University Business School.

Find out more about Francesco and his research here