The UK’s “one-off” tax hike? Looks more like a warm-up. And us traders better start paying attention, because what happens next could hit GBP sentiment and growth expectations square in the face.
Last year, Chancellor Rachel Reeves rolled out a bold £70 billion spending plan with £40 billion in tax increases, aimed squarely at British businesses. At the time, she promised no repeat performances: no more borrowing, no more taxes.
But markets, and voters, might want to hold onto their wallets.
Here’s what’s really going on and why it matters:
1. Reality Bites: The Fiscal Math Isn’t Adding Up
Earlier this year, the Treasury had just £9.9 billion in headroom, barely enough to keep daily spending covered by tax receipts. Now, rising debt costs, sluggish tax income, and downgraded growth forecasts are closing that gap fast.
The OBR projected 1% growth in 2025 and 1.9% in 2026, but let’s be honest, that’s starting to look like fantasy. For traders, it’s simple: less headroom means less room to stimulate the economy, and that spells slower GDP growth. Not exactly bullish for the pound or UK risk assets.
2. Tax Rises: Practically Inevitable
Reeves won’t borrow, but she’s committed to spending more on defense and the NHS. That leaves her one path: raise taxes, again.
Even a slight downgrade in growth (say, to 1.5% in 2026) could cut her fiscal cushion in half. ING says that alone risks a £4 billion hole.
What does that mean for GDP? Less household spending, tighter business margins, two pillars of growth take a hit. More taxes = weaker demand.
The thing is, it looks like Reeves is cornered. New revenue or broken promises, there’s no middle ground left.
3. Reeves Dodges Questions,But Markets Know What’s Coming
Asked by Sky News if more taxes were on the way, Reeves dodged: “I’m not going to write budgets for the next four years.”
It only meant, she knows what’s coming but won’t admit it yet.
Meanwhile, April GDP shrank by 0.3%, a brutal reminder the UK economy isn’t cooperating. These kinds of surprises wreck spreadsheets and pile pressure on policy.
Markets hate political fog, and Reeves’ non-answer only adds uncertainty. Expect volatility in GBP around OBR forecasts and future statements.
4. Labour’s Promise Box Is Now a Trap
Labour vowed not to touch income tax, national insurance, or VAT, but now those pledges are boxing Reeves in. Break them, and the political blowback will be fierce. Stick to them, and the numbers won’t add up.
Paul Johnson from the IFS nailed it: “We can’t have everything we might want.”
So Reeves might resort to smaller, quieter hikes: extending frozen tax thresholds, cutting pension perks for high earners, or slapping new levies on gambling and property.
Either way, traders should expect tighter wallets, and slower growth.
Here’s the Takeaway: This Budget’s Just Getting Started
Reeves walked in with rules. But reality doesn’t care about fiscal frameworks. As economic growth sputters, UK fiscal policy is becoming a moving target. Traders, brace for unpredictable policy pivots.
Whether you're holding UK assets or just watching the spillover into European sentiment, this story isn’t done, it's just warming up.
