UK Chancellor of the Exchequer Rachel Reeves attends a roundtable discussion during a visit to a British Steel site in Scunthorpe, England, April 17, 2025.
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The fall budget is always an important event for financial markets, but never has that been more evident than this year, with investors focused on Treasury Secretary Rachel Reeves’ spending and tax plans.
These self-imposed “fiscal rules”, which Reeves laid down last year and which he has refused to adjust, have left the country with an estimated budget shortfall of around 20 billion to 35 billion pounds ($26 billion to $46 billion), with rising borrowing costs, sluggish growth and a reversal of welfare spending, leaving it with little choice but to raise taxes to plug the hole.
Tax increases are widely seen as inevitable. A breach of Mr Reeves’ rule – which aims to ensure that day-to-day spending is covered by tax revenue and that public debt as a share of economic output is reduced by 2029-30 – could cause turmoil in the gold market and raise Britain’s borrowing costs as creditors could question Mr Reeves’ restraint and spending control.
Market strategists agree that Mr. Reeves needs to stick to his rules and that selective tax increases are likely to be made to appease investors.
But they warn the chancellor will have to do more than that, as investors want measures to cut spending, boost economic growth and curb inflation, and help the Bank of England stay on course with interest rate cuts likely to resume in December and into next year.
“Financial markets cannot afford to modify or ignore fiscal rules. Indeed, the Chancellor has been keen to emphasize his commitment to the rules, describing them as ‘iron-clad’ in his pre-Budget speech on 4 November,” Nomura economists said in a pre-Budget analysis.
British economists Robert Wood and Elliott Jordan Doak of Pantheon Macroeconomics have already predicted a slight decline in gilts after the Budget, predicting the “reality” of Mr Reeves’ choice will “disappoint”.
“Political issues have started to take hold sooner than we expected, with the government not increasing income tax and bringing forward the monetary correction we had predicted.However, the political situation has also deteriorated more than we expected. “As a result, the budget is beginning to unravel. As a result, we have raised our 10-year Treasury yield forecast to 4.65% and our 30-year Treasury yield forecast to 5.45% by the end of 2025,” they wrote in an analysis on Friday.
On Monday, Britain’s benchmark 10-year government bond yielded 4.552%, while the 30-year government bond yielded 5.364%.
“Unusually important risk event”
Significant uncertainty has emerged in markets on Wednesday, not just about what Reeves will announce and how he will abide by his rules, but also about what the Office for Budget Responsibility (OBR) will say when it releases its economic and fiscal outlook on Wednesday.
Earlier this month, just as the Chancellor looked set to shelve rumors that the Treasury could announce an income tax rise in the November 26 Budget (breaking his election manifesto promise), UK bond yields soared, sending a signal to the government that any major reversal in revenue-raising measures, debated or not, would be met with a harsh reaction from investors.
Not knowing what to expect or what you’ll get for your budget is making markets nervous, strategists say.
“The uncertainty surrounding this year’s fall budget is almost unprecedented, making it an unusually significant risk event for the market,” Matthew Ryan, head of market strategy at Everly, said in emailed comments last week.
“Investors are calling for spending cuts, but any savings are likely to be minimal and markets will punish governments if they break voluntary borrowing rules,” he added.
British Chancellor of the Exchequer Rachel Reeves (Republican) stands alongside British Prime Minister Keir Starmer (left) as he receives applause after delivering a speech on the second day of the Labor Party’s annual conference in Liverpool, northwestern England, on September 29, 2025.
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“The key will be whether Reeves can communicate to markets that he has a credible plan to balance the books in a sustainable way while boosting economic growth,” the strategist concluded, noting that “an anti-growth budget that is heavy on taxes and perceived as clearly lacking a concrete strategy to restore balance” would be bearish for UK assets such as the pound and gold.
David Aikman, director of the National Institute of Economic and Social Research, agreed, speaking to CNBC on Monday. “The important thing is that we have a reliable budget that puts the UK’s fiscal position on a stable footing. That means we have enough leeway on our fiscal rules to ensure that six months or a year from now we don’t find ourselves in a situation where we’re going to have to do another fiscal reset.”
“The key thing that investors are looking at is the credibility of the policies that he puts out. One aspect of that credibility is whether they are significantly delayed,” he said, meaning that policy action would be postponed until later in the current forecast period, which is when the next general election is scheduled for 2029.
The government faces accusations that it risks exacerbating market uncertainty and undermining consumer and business confidence by engaging in what the Resolution Foundation describes as “over-flying kites” – explaining and leaking potential tax policy changes to gauge public and market reactions in the run-up to the budget.
Mr Eickman agreed that the “drip feed” of budget news was creating policy and business uncertainty, but said the chancellor still had room to turn things around.
“If there’s a clear package in the budget and it’s seen as credible by the market and it has the potential to be growth-enhancing, then she (Reeves) will definitely have an opportunity to fix the things that we need to fix.”
