Headline: Stronger OBR Outlook Eases Pressure on Reeves to Lift Income Tax Rates
Introduction: The UK’s fiscal outlook has improved ahead of the budget, giving Chancellor Rachel Reeves additional room to maneuver and reducing the likelihood of an immediate rise in income tax rates. Markets, meanwhile, are recalibrating expectations for Bank of England policy as fresh inflation and jobs data loom.
Stronger-than-expected tax receipts and firm wage growth have reportedly led the Office for Budget Responsibility to deliver a more favorable forecast, shrinking the fiscal shortfall to around £20 billion and creating an estimated £15–£20 billion of headroom against the government’s fiscal rules. While a productivity downgrade was anticipated, it appears to have been partly offset by the upside in revenues. The improved numbers mean Reeves no longer needs to increase income tax rates to plug the gap, preserving Labour’s election pledge on rates for now.
That said, the Chancellor’s strategy still points to meaningful revenue-raising measures elsewhere. Policy adjustments under consideration include lowering certain income tax thresholds and tightening rules around salary sacrifice schemes to bolster public finances. These steps would support the budget’s fiscal consolidation goals without directly lifting headline income tax rates.
In markets, traders have trimmed their expectations for Bank of England rate cuts this cycle, reducing implied easing from 64 basis points to about 58 basis points. Odds of a December cut remain high at roughly 80%, but two UK CPI releases and one employment report are due before the next BoE decision—data that could reshape the path for interest rates, inflation, and growth.
Key Points: – OBR’s latest outlook reportedly narrows the fiscal gap to about £20bn and adds £15–£20bn of headroom. – Stronger tax receipts and wage growth offset part of an expected productivity downgrade. – Reeves is no longer expected to raise income tax rates but may lower thresholds and target salary sacrifice schemes. – The government maintains its pledge on income tax rates while still pursuing broader fiscal consolidation. – Markets trimmed BoE rate-cut pricing from 64 bps to around 58 bps. – December rate-cut odds sit near 80%, with key CPI and employment data due before the meeting.
