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Rachel Reeves has reassured financial markets with a commitment to adhere to her fiscal policy, promising significantly more leeway than before.

However, fulfilling this pledge will require her to implement tax increases that could continue the unprecedented strain on household incomes, potentially affecting living standards as Labour prepares for the upcoming general election.

The UK chancellor announced £26 billion in tax hikes in her Budget, primarily through an extended freeze on personal tax thresholds. These measures, which she acknowledges will impact “working people,” aim to bring “stability” to the nation’s finances while steering clear of “reckless borrowing.”

Many significant personal tax changes are slated to take effect only from 2028. In the meantime, Reeves plans to spend billions more than initially projected, focusing on welfare for larger families, support for children with special educational needs, and inflation-adjusted benefits, according to the Office for Budget Responsibility.

Helen Miller, director at the Institute for Fiscal Studies think-tank, characterized the chancellor’s approach as a “spend now, pay later” Budget.

“My worry is there is too much backloading of this fiscal adjustment, and I suspect this will stand in the way of a decisive decline in gilt yields in the wake of this Budget,” added Mahmood Pradhan, head of macro at the Amundi Investment Institute. “It leaves the window open for plans to go awry as we get closer to the next election.”

Reeves’ decisions give her a bigger £22bn margin for error against her fiscal target to fund day-to-day spending — excluding investment — entirely with tax receipts in 2029-30.

Richard Hughes, chair of the OBR, said that as a result she was now more likely to meet her fiscal rules without further policy changes.

Reeves was helped in this by a more favourable set of forecasts from the fiscal watchdog than many analysts were expecting in the run-up to the Budget.

A heavily trailed downgrade to long-run productivity growth did not hit the public finances as much as feared, because higher inflation and stronger wage growth are buoying revenues. A shift in the share of GDP going to workers, rather than more lightly taxed corporate profits, also helps.

But while increasing her headroom, Reeves is also delaying the fiscal consolidation. The bulk of the improvement to the public finances now comes a year later, from 2028-29 onwards, the OBR said in its analysis, which was released in error ahead of the chancellor’s speech.

Hughes said that even after this Budget, the UK would have a debt burden twice as big as the average advanced economy and be paying more to service that debt “than at almost any other time in its postwar history.”

The fiscal consolidation remains modest overall. The average overall tightening is just £2bn, or 0.04 per cent of GDP, according to the OBR, with borrowing £15bn higher next year but £6bn lower by 2029-30.

Meanwhile, the outlook for living standards has worsened. As expected, the OBR’s forecasts revealed a steep 0.3 percentage point downgrade in the watchdog’s forecasts for trend productivity growth.

The OBR raised its forecast for GDP growth in 2025 to 1.5 per cent after a strong performance in the first half but cut it for later years, leaving growth in 2029 at just 1.5 per cent, down from 1.8 per cent previously.

Household disposable income is set to grow at just 0.5 per cent a year on average, the second-worst period for living standards since the 1950s.

Disappointingly for a government that has made growth its number one mission, the OBR judged that none of its Budget measures would have a “material” effect on the economy’s longer-term potential. 

While Reeves said she was taking action to cut living costs, the OBR stressed that her freezes on fuel duty, rail fares and prescription charges would have only a one-off effect on inflation — lowering it by 0.4 percentage points in 2026 but making no difference later.

Inflation has already proved more persistent than the OBR expected in March and the watchdog now expects it to return to the Bank of England’s 2 per cent target only in 2027 — a year later than it was expecting in March.

Investors are now asking whether the promised consolidation will actually be delivered. 

As the Resolution Foundation think-tank noted, it left the government “set to phase out cost of living support, implement significant tax rises and cut public services ahead of the next election”, which is expected in 2029.

There is also uncertainty over how much will be raised from the main tax measures — the extended freeze on personal tax thresholds and the changes to salary sacrifice rules from 2029. 

The OBR noted that the effect of freezing thresholds would be “very sensitive to inflation and nominal earnings growth” and its forecasts already assume that changes in behaviour will halve the amount raised by charging NICs on salary-sacrificed pensions contributions. 

“The Budget reinforces the impression that the government is unwilling to take difficult decisions to rein in public spending,” said Michael Saunders, adviser at Oxford Economics. 

“There is likely to be some scepticism as to whether that postponed tightening will be delivered in the run-up to the next election.”

Data visualisation by Keith Fray