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Budget 2025: Fiscal Drag and the Truth About the UK’s Outlook 20.11.25

The UK’s Autumn Budget, set for 26 November 2025 and delivered by Chancellor Rachel Reeves, arrives at a time of mounting economic strain. With growth slowing, inflationary pressures lingering and public finances under stress, the government faces a difficult balance: maintain fiscal responsibility while meeting public expectations for improved services, cost-of-living relief and long-term economic renewal. The outcome is likely to be a Budget combining limited support measures with indirect tax increases, reflecting the narrow fiscal headroom available.

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A Fragile Economic Context​

The underlying economic environment remains subdued. GDP expanded by only 0.3% in the second quarter of 2025, signalling weak momentum as the UK negotiates global uncertainty and domestic structural challenges. The Treasury is wrestling with a fiscal shortfall estimated between £20 billion and £40 billion. While headline rates of income tax, National Insurance and VAT are expected to remain unchanged, the government is relying heavily on “fiscal drag”, the freeze on tax thresholds that automatically pushes more earners into higher brackets as wages rise.

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Targeted Measures, Limited Scope

Despite the squeeze, some supportive measures are expected. Targeted cost-of-living relief for lower-income households may offer short-term respite, while modest adjustments to business allowances aim to encourage investment and innovation. The government has also signalled continued support for housing, green energy and strategic infrastructure, sectors crucial for boosting productivity and long-term economic resilience. However, with fiscal space constrained, these initiatives are likely to be incremental rather than transformative.

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Mounting Expert Criticism

Forecasts from economists and research institutions paint a challenging picture. Goldman Sachs describes the package as a £30 billion mix of tax rises and spending cuts, arguing that the balance leans too heavily towards revenue-raising and not enough towards supporting growth. The Resolution Foundation warns that even minor downgrades to the OBR’s productivity outlook, just 0.3 percentage points, could add £14 billion to borrowing and £6 billion to debt interest by 2029 to 2030. Achieving £20 billion of fiscal headroom could require up to £31 billion in tightening, including around £26 billion in additional taxes. Unsurprisingly, business owners and high earners are already voicing alarm about how much this Budget is likely to cost them.

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Fiscal Drag and Business Concerns

The freeze on tax thresholds has become a major point of contention. PwC estimates that extending the freeze to 2030 could raise more than £10 billion. The OBR projects that 8.3 million additional people could be pushed into higher tax bands over the next five years. For many middle-income households, this fuels concerns about fairness and diminishing take-home pay. Businesses are also feeling the pressure. A recent ICAEW survey shows that 60% of firms now view the rising tax burden as a critical challenge, with 56% saying they would freeze hiring or cut staff if taxes rise further.

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Questions Over Long-Term Credibility

Analysts caution that the Budget risks relying too heavily on optimistic assumptions. Critics argue that without stronger reforms and a more convincing plan for sustainable growth, the government’s approach may appear short-term and reactive. The absence of a clear long-term strategy raises doubts about the credibility of the fiscal framework and its ability to withstand future shocks.

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Concern Over Wealth Flight

Another growing worry is the reaction of high-earning and internationally mobile individuals. Paul Donovan, Chief Economist at UBS Global Wealth Management, notes that clients are raising more questions about changing tax rules, although he does not expect a large-scale exodus. However, there are signs of movement among some wealthy individuals. One major crypto and tech CEO, for example, is reportedly working with lawyers to move operations to Singapore for tax reasons. Since a relatively small group of top earners contributes a large share of UK tax revenues, even modest migration could have significant fiscal consequences.

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The Controversial Exit Tax​

Adding to the unease are rumours of a proposed 20% “exit tax”, or settling-up charge, on unrealised capital gains for individuals leaving the UK. Supporters argue that it would promote fairness and raise around £2 billion. Critics warn that it could accelerate capital flight and discourage entrepreneurship. With revenues limited and risks substantial, the measure could ultimately prove counterproductive.

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Implications for Growth and Confidence

Although fiscal policy typically takes a year to influence the real economy, public sentiment moves faster. With investor confidence fragile and businesses already sensitive to rising costs, the Budget’s impact may be felt well before any formal measures take effect. In a context of limited fiscal room and heightened uncertainty, households and firms may tighten spending and delay investment in anticipation of future pressures.