Reeves’s endless tax scaremongering is killing off animal spirits

UK public finances and activity look weaker ahead of Chancellor Rachel Reeves’s Budget: public sector debt rose £17.4bn last month and government borrowing has reached £116.8bn year-to-date, roughly £10bn above OBR forecasts, while retail sales fell 1.1% and the composite PMI slid to 50.5. Signals that the Budget could include a further £25bn–£35bn of tax rises and a possible extension of frozen tax thresholds (IFS estimates cost to basic-rate taxpayers £405 and to those pulled into higher-rate bands £1,129) are already depressing household and corporate spending and undermining a pre-Christmas retail rebound. The article highlights that limited fiscal “headroom” (Spring Statement left £9.9bn versus the typical £20bn–£40bn) and the OBR’s frequently large forecast errors (eg. a March 2024 forecast of £87bn becoming an actual £148bn) mean pervasive policy uncertainty is amplifying market volatility and could materially weigh on near-term growth.

Analysis

Public finances have weakened ahead of Chancellor Rachel Reeves’s Budget: public sector debt rose £17.4bn last month and government borrowing has reached £116.8bn year-to-date, roughly £10bn above OBR forecasts, creating acute pressure on spending priorities and debt service costs. The article highlights that markets have already reacted, with swings in global bond markets and elevated uncertainty about tax revenues and future fiscal headroom.

Real economy indicators point to near-term softness: retail sales fell 1.1% last month and the composite PMI slipped from 52.2 to 50.5, while consumer sentiment is deeply negative (YouGov: 0% rate the economy “very good”, 79% rate it “fairly/very bad”), consistent with households and firms hunkering down amid repeated policy trial balloons. The run-up to the Budget—signal-and-retract tax messaging and talk of another £25bn–£35bn of tax rises—appears to be suppressing spending and investment ahead of the critical pre-Christmas period.

Fiscal credibility and forecasting risk are central vulnerabilities: Spring Statement headroom was only £9.9bn versus pre-pandemic norms of £20bn–£40bn, and the OBR has shown large in-year errors (March 2024 forecast £87bn becoming an actual £148bn). This combination of higher borrowing, active talk of tax increases, and unreliable medium-term forecasts raises the probability of policy-driven market volatility and constrains a near-term economic rebound.

Key Decisions for Investors

• Reduce exposure to UK consumer discretionary and domestic retail positions ahead of the Budget given a 1.1% retail sales decline and heightened pre-Christmas demand risk
• Monitor UK gilt yields and bond market volatility closely and consider trimming duration or adding sovereign-debt hedges as borrowing has risen to £116.8bn YTD and debt-service pressures are highlighted
• Maintain a defensive tilt toward cash-generative, high-quality domestic sectors (utilities, healthcare, staples) and avoid levering UK cyclical exposures until Budget details are published
• Delay major active allocations to UK-listed, fiscal-sensitive companies until the Budget clarifies whether £25bn–£35bn of tax rises or a tax-threshold freeze extension (IFS cost estimates £405/£1,129) will be implemented
• Employ short-dated event hedges (options or credit protection) around the Budget to guard against policy surprises and further OBR forecast-driven market moves