Market Flash: Market impact of the Budget 2025

Investors may have been a bit caught off guard by the early leak of the Office for Budget Responsibility’s (“OBR’s”) report, but in the end, the markets digested the Budget reasonably well.

Investors will gain confidence from the Chancellor’s £22bn fiscal headroom she gave herself over her fiscal rules (more than double the previous figure, albeit still lower than the historical average). The OBR’s growth downgrade was not as bad as expected, which made achieving the extra headroom easier.

Tax rises are covering the extra welfare spending which means borrowing is still forecast to fall by the end of the parliament (the OBR expects tax as a % of GDP to reach a record high of 38% by 2030). That said, there will be lingering doubts around the credibility of tax revenues and the back-loaded nature of some of them.

For example, the increased National Insurance payments on salary sacrifice pension contributions will not be introduced until 2029. Some may doubt whether it will even come in. Freezing of income tax bands can generate a lot of revenue but the actual outcome is highly dependent on inflation and earnings growth.

Market Impact

Overall, the government will likely take the initial gilt market reaction as a vote of confidence. After an early period of slight volatility, gilt yields were little changed as the Chancellor finished her speech.

Shortly afterwards, the Debt Management Office (“DMO”) published their report showing their forecast for gilt issuance. The total number of gilt sales were a bit less than the market had expected. In addition, the DMO skewed issuance towards shorter-dated bonds, away from longer-dated bonds where the demand-supply dynamics have been deteriorating of late.

This helped to push yields lower in the afternoon, especially for longer-term borrowing rates where yields fell around 10bps. The UK equity market in aggregate rose slightly, but certain sectors were impacted more. While banking shares rallied, after being spared an increase to the banking levy, the higher gambling tax hurt bookmaker shares. The pound was also up slightly.

The fact that the pound rose as gilt yields fell suggests overseas investors viewed the Budget as being broadly credible.

From the Bank of England’s point of view, the Budget was perhaps less disinflationary than expected. However, we think this still leaves the strong possibility of another interest rate cut at their next meeting in December.

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