Budget 2025: Classic tax and spend or a ‘smorgasbord of misery’?

Copyright (c) 2024 Fred Duval/Shutterstock

The long-awaited budget was unveiled today only to be overshadowed by the Economic and Fiscal outlook, which was too hastily released by the Office for Budgetary Responsibility, revealing details of the Chancellor’s tax and spending plans.

Here is a summary of the state of the national economy and some of the headlines announced in the budget.

The economic outlook

According to the hastily released OBR Economic and Fiscal Outlook (Nov 2025) the UK economy enters 2025–30 in a period of subdued growth and persistent structural pressures. The OBR expects real GDP to grow at an average of 1.5% per year, slightly weaker than previously forecast, chiefly because of a further downgrade in underlying productivity growth. Medium-term productivity is now projected at 1.0%, down from 1.3%, reflecting historical underperformance, weak post-pandemic rebound, and structural global headwinds such as trade fragmentation and sectoral shifts.

Despite the weaker real outlook, nominal wages and inflation run hotter in the near term, driven by stronger-than-expected wage pressures and persistent core inflation. Cumulative real wage growth over the next two years is around ¾ percentage points higher than previously expected, while inflation is around ½ percentage points higher, pushing CPI to 3.5% in 2025 and 2.5% in 2026, before returning to the Bank of England’s target in 2027 — a year later than earlier forecasts.

The labour market stabilises but remains weaker than before the pandemic. Unemployment is expected to hover around 5% until 2027, falling only gradually thereafter. Real household disposable income rises sharply in 2024–25 but decelerates to barely 0.25% per year, well below historical averages, eroding living standards and consumer confidence.

On the fiscal side, the outlook is challenging. Tax receipts increase faster than the economy, driven by fiscal drag, frozen thresholds, and the shift in nominal growth toward labour income rather than profits. This raises revenue, but spending pressures — welfare, disability benefits, SEND provision and debt interest — outpace it, widening the underlying deficit. Before new policy measures, borrowing is £17 billion higher in 2025, and £6 billion higher by 2029–30, than previously expected.

Even after policy measures and consolidation, the nation will be left with historically high taxes (38% of GDP), and high expenditure (44% of GDP). Public sector net debt remains near record highs, stabilising around 96% of GDP by 2030–31, roughly double the average for advanced economies.

The OBR warns that these forecasts sit atop substantial risks: weaker productivity, higher interest rates, equity market corrections, and the unresolved fiscal challenges of local authorities and welfare caseloads. A sustained slowdown in productivity alone could erase the government’s headroom and flip the current surplus back into deficit.

In short: modest growth, elevated inflation, stagnant living standards, structurally weak productivity, and continued fiscal pressure. The UK is stabilising, but fragile — and only marginally more resilient than one year ago.

Headline announcements

If there was any surprise in the OBR’s outlook it was that the chancellor has more headroom than expected, from £9.9bn to £22bn, this has enabled the Government to more easily abolish the two-child benefit cap, a move to address rising child poverty and satisfy Labour back benches.

The chancellor confirms that income tax thresholds will be frozen until April 2031, extending the previous Conservative Government’s policy. This is a progressive move in so far as higher earners will pay more than lower earners although more people will pay higher rates - here's a look at all the key tax rises. The IfS have already stated that raising taxes for higher earners would have been more progressive than the tax freeze.

There will also be a new mansion tax on £2m homes, a mileage charge for electric vehicles, National Insurance on pension contributions above £2,000, and changes to Isa rules.

In total this will raise taxes by £26bn by 2029-30.

In response to rising unemployment the chancellor has also announced a number of measures to provide:

• Free training for under-25 apprenticeships in SMEs,

• A new youth guarantee with £820m over three years.

In summary the budget has introduced less tax and more spending, with taxes increasing as we approach the next election.

Implications for the East of England

There is relatively little detail in the budget documents about the English regions and yet again the East of England does not merit a single mention. There are, however, implications for regional growth and development arising from the policy and funding announcements.

Housing: To unlock more new homes across the country, the government is, for the first time ever, devolving housing funds across Greater Manchester, Greater London, Liverpool City Region, the North East, South Yorkshire, West Midlands and West Yorkshire through the integrated settlement. In total, £1.3 billion of the new National Housing Delivery Fund will be devolved, supporting established and non-established Mayoral Strategic Authorities.

Disappointingly the East of England is not included in this settlement but there are hopes that Cambridge & Peterborough can move towards a similar settlement.

Fiscal devolution: The government has announced a historic commitment to fiscal devolution, giving mayors and potentially other local leaders, subject to consultation, the option to introduce a visitor levy on overnight visitor accommodation in their area. This will fund further investment in growth locally, including the visitor economy. 

Infrastructure: The government’s reforms are unblocking major projects – from reservoirs to wind farms– and providing certainty and stability through the 10-Year Infrastructure Strategy, backed by at least £725 billion over the next decade to deliver significant, long-term schemes such as the Oxford to Cambridge and Northern growth corridors.

Neighbourhoods: The government will invest £18m over two years in up to 200 playgrounds across England, renewing communities and supporting the government’s commitment to Pride in Place. The budget also includes funding for 250 new neighbourhood health centres.

Backing business and unlocking innovation: The government is introducing tax changes to incentivise greater investment into starting and scaling companies, including a new UK Listing Relief from Stamp Duty Reserve Tax, and reforms to the UK research and development (R&D) system. This will support the UK’s modern Industrial Strategy.

The government will also stick to the commitments set out in the corporate tax roadmap, to provide businesses certainty, and make targeted changes to the capital allowances treatment of main rate assets in a way that preserves the value of relief for future investment.

Implications for business

For businesses the response has been mixed.

The Budget introduces “permanently lower” business rates for pubs, restaurants and hospitality venues. That measure has been broadly welcomed by businesses in those sectors and will benefit the high street.

In sectors aligned with government priorities — e.g. skills, infrastructure, growth industries — there is cautious optimism that the Budget’s long-term investments and commitments may help support growth prospects, especially if private investment and public-private partnerships are encouraged.

Some analysts note that the Budget maintains high levels of public and private investment: over the Parliament the government has committed to more than £120 billion in additional departmental capital spending, which firms view as bolstering infrastructure, public services, and (potentially) business opportunities. (GOV.UK)

A key flashpoint is the 2% rise in Dividend Tax, which many business owners and investors regard as “a kick in the teeth.” This has triggered sharp criticism, especially from those whose companies rely on dividend income. The broader tax rises have also dampened business sentiment, with concerns this could suppress wages, depress consumer demand, or cut into reinvestment.

Summary

The doom trailed months before the budget has not quite materialised, with the OBR’s outlook being more optimistic than expected, although there has clearly been a negative impact on business and consumer confidence and subsequent economic performance.

Some commentators are responding positively and hoping that the economy may have turned a corner. Market reaction has so far been fairly benign. For businesses in industries such as hospitality, infrastructure, or growth-linked sectors, the Budget offers some clear incentives — especially via lower business rates and planned investment in public capital. For others the budget is not sufficiently pro-growth.

In short: the Budget has not been a radical reform of either tax or spend. It has introduced a number of piecemeal incentives and stealth taxes, which are largely funding increased welfare benefits. Neither has it delivered a unified “win” - some see opportunity, others see risk. Much continues to depend on whether the Government’s long-term growth strategy will deliver enough productivity gains and demand to offset higher fiscal burdens.

Given that productivity has not improved since the 2008 financial crisis the question remains about whether this budget is sufficiently inspired to meet the challenge.