The Autumn Budget of 2025: Broken Promises, Higher Welfare Spending, and Slower Economic Growth
On the wintry Wednesday afternoon of 26 November 2025, following months of stage-managed informal leaks, press briefings, mixed messages, and several U-turns, the UK’s Chancellor of the Exchequer Rachel Reeves took to the floor in the House of Commons to deliver her much-awaited Autumn Budget, many of the contents of which had already been road-tested in the court of public opinion. Reeves’ presentation, expertly overseen by Nusrat Ghani in her role as deputy Speaker, began 45 minutes after a 203-page densely-worded forecast on the nation’s ‘Economic and Fiscal Outlook’ by the Office for Budget Responsibility (OBR) was inadvertently released online for public consumption in a serious breach of protocol, before parliamentarians could scrutinise the document- which would normally have been after Reeves had introduced her “Budget for fair taxes, strong public services, a stable economy.”
The Labour election manifesto of 2024 had promised not to increase the basic, higher or additional rates of income tax, National Insurance (NI), or VAT for “working people.” Income tax and NI contributions are, however, two of the largest sources of income for the government. Some compromise was therefore inevitable. The Chancellor had to confess that “ordinary people” would “pay a little bit more” as she extended the income tax threshold freeze for another three years, from April 2028 to 2031, bringing many more people into either basic (20 p) or higher (40p and 45p) tax bands as their wages increase while tax thresholds stay the same, through a process of “fiscal drag.” NI thresholds have similarly been frozen, as have the tax-free personal allowance (at £12, 750 per annum) and the personal allowance on savings interest (at a basic rate of £1,000). Pension contributions over £2,000 in “salary-sacrifice” schemes will be subjected to NI contributions from 2029, raising an extra £4.7 billion while discouraging retirement savings.
Some of the government income has had to be raised through a series of smaller taxes, to a total of £26 billion- the highest overall tax burden since records began in 1970. This tax burden is expected to reach 38.3% of GDP by 2030/31. Taxes on income from property, savings, and dividends will go up by two percentage points each. The ‘mansion tax’ (high-value council tax surcharge), a flat annual rate of tax of £2,500 on properties valued at £2 million or more, rising to £7,500 for those valued at £5 million and over, is projected to raise only £400 million, and that too only from 2028-29. A complete overhaul of the outdated council tax system would have been preferable. Annual cash ISA savings will be capped at £12,000, in place of the current limit of £20,000. Remote gaming (online casinos) and dairy-based drinks are being taxed, while alcohol and tobacco duties continue to rise in line with the Retail Price Index (RPI). Fuel duty has been frozen until September 2026. A pay-per-mile excise duty on electrical vehicles is meant to offset falling revenue from fuel duty as the uptake of greener vehicles grows.
The UK’s public finances are said to be seriously overstretched, with an alleged inherited £20 billion “black hole” to plug, while public spending continues to rise inexorably. This fiscal gap appears, however, to been massively overstated, with the OBR having identified an actual surplus of £4.2 billion. Meanwhile, debt interest payments, with a national debt at £2.6 trillion-83% of GDP-are expected to rise to £111.2 billion by 2026, representing 8.3% of total public spending. The Chancellor’s commitments to cut NHS waiting lists, to spend on secondary schools, to boost defence spending to 2.6% of GDP, and above all to honour a ballooning welfare bill will put added pressures on the public purse. Most of this increased spending will go on benefits, despite the provisions of the Universal Credit Act 2025 to “alter the rates of the standard allowance, limited capability for work element and limited capability for work and work-related activity element of universal credit and the rates of income-related employment and support allowance.” The welfare bill is expected to rise by £73.2 billion to £406.2 billion over the next five years. The controversial two-child benefit cap, which limits universal credit and tax credit claims to the first two children in most households has been scrapped from April 2026, at an estimated cost of £3 billion. This particular measure has been well-received by Labour backbenchers and is expected to help lift 450,000 children out of poverty. The pension triple lock has been retained, and Winter Fuel Payments for pensioners reinstated. Lower energy bills and frozen rail fares will bring down inflation and help alleviate cost-of-living pressures. Socially desirable increases in the national minimum wage and the national living wage will increase labour costs and put extra pressure on employers, particularly in small business.
Economic growth is said to be important to the Chancellor. The OBR has, however, revised its forecast of real GDP growth to 1.5% in 2025, 0.3% “slower than we projected in March, due to lower underlying productivity growth.” Its growth estimates have further been lowered to 1.4% in 2026 and 1.5% in each of the following years. Structural problems in the British economy have slowed growth and hampered productivity for several decades. In this gloomy economic climate, relatively unambitious investments in low-carbon technology and nuclear power, capital investments in infrastructure and housing, tax incentives for entrepreneurs, the lowest rate of corporation tax in the G7, and devolved budgets for seven Mayors, are all designed to stimulate growth.
The Chancellor has met her own fiscal rules, with a forecast budget surplus and falling public sector net financial liabilities, as a percentage of GDP, by 2029/30. The Chancellor’s fiscal headroom, a buffer against economic turbulence, will be more than doubled from £9.9 billion to £22 billion, in turn reducing government borrowing costs. The bond markets seem reassured for the moment. Most of the Budget measures will not take effect immediately. When Reeves’ prescriptions eventually take hold, in the form of staggered tax rises, households (especially those with middle-income earners and savers) and businesses will inevitably suffer the unintended side-effects of her various treatments.
Ashis Banerjee