The chancellor Rachel Reeves achieved something important with the budget: the bond markets did not crash, and there has been no subsequent market turmoil.
Ever since the infamous Liz Truss mini budget of September 2022, the worry is the bond markets will bring down a sitting government.
Instead gilt yields ended the day lower and sterling strengthened against both the US dollar and the euro – a reflection that the budget was reasonably well received by investors, despite announcing £26bn in tax rises.
The positive reaction seems in response to the increase in fiscal headroom to £21.7bn in 2029-30 against the prior £9.9bn that the chancellor announced.
But this may be storing up trouble for the future.
“The chancellor may not even be out of the woods, with regards to her fiscal headroom,” argued Oliver Jones, head of asset allocation at asset manager Rathbones. “£22bn is still less than the average headroom chancellors have historically maintained against their fiscal rules, in an era of heightened economic volatility.”
In a similar way, Daniel Casali, chief investment strategist at wealth manager Evelyn Partners, noted: “Markets have been calm, but storm clouds could gather in the future.”
This outlook does not bode well for the chancellor.
But the budget could also be a missed opportunity to address the UK’s structural investment weaknesses and could see the government needing to raise taxes again at next year’s budget, according to Oliver Jones.
“This budget is another missed opportunity to address the structural causes of the UK’s tough fiscal situation by prioritising economic growth and investment,” he said.
Economic harm
The changes Reeves announced to pension salary sacrifice rules – where employers and employees will have to pay National Insurance on contributions over £2,000 – faced much criticism.
“Applying National Insurance to salary-sacrificed pension arrangements above £2,000 will harm the economy, businesses and pension saving,” said Zoe Alexander, executive director of policy and advocacy at Pensions UK.
“The changes to pension salary sacrifice rules, which continue a trend under this government of less generous tax treatment of pensions, were particularly disappointing,” added Jones. “They will work against the government’s broader agenda to drive more investment from pension funds into productive assets in the UK.”
And Steven Leigh, associate partner at Aon, noted: “In the longer term, my fear is that restrictions on salary sacrifice could disincentivise both workers and employers from saving more into pensions. And that seems at odds with the remit of the Pensions Commission announced earlier in 2025.”
A point shared by Hannah Gurga, ABI director general. “The changes to the salary sacrifice scheme are disappointing, especially at a time when we need to be encouraging people to save. This does the opposite and risks pushing millions of people into poorer retirements, something government and industry have been working hard to avoid,” she said.
Future problems
For Reeves, two key pieces of data are going in the wrong direction: growth is going downward and inflation remains awkwardly sticky, with the next move much anticipated.
In the budget Reeves seems to have followed the approach of Saint Augustine. “The chancellor is asking markets to trust her commitment to be fiscally prudent in the future, just not yet,” said Rupert Harrison, UK senior advisor at PIMCO.
This, in itself could be problem, because as it stands Reeves has escaped a bond crisis, but the key theme is she could be storing up problems for the future.
“Longer-dated government bonds, which are particularly sensitive to perceptions about the fiscal outlook, are likely to remain volatile,” said Oliver Jones.
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