Budgets always generate far more heat than light. This one was no exception. We had the usual theatre in the Commons, a blizzard of leaked snippets, and – in a fitting finale – the OBR accidentally posting its 200-page tome an hour before the Chancellor stood up. Omnishambles is the polite word for it.  

Strip away the political drama, though, and the picture that emerges is much less exciting than the headlines suggest. In my view, this Budget does very little to change the medium-term outlook for the UK economy – and, by extension, the investment case for UK assets.

We covered it in full in this week's Noise Cancelling podcast:

What actually changed?

The OBR has nudged up its near-term growth numbers. It has revised up its 2024 growth outcome and now expects 1.5% growth in 2025, up from its previous 1% forecast, which is bang in line with what I’ve been saying for most of this year. Over the full forecast period, it now assumes the economy grows by roughly 1.5% a year in real terms – slightly lower than it was projecting in the spring, mainly because it has downgraded its view of productivity growth by 0.3% pa.

Even with that downgrade, a stronger starting point in 2024–25 means the OBR now thinks the economy will be about £40bn larger (in nominal terms) by 2029/30 than it expected back in March. So, once again, the OBR has been too bearish about the economy and in my view, will be again.

On the tax side, there are two important points:

• Taxes are going up, but mainly later. The overall tax take is projected to be about £26bn higher in 2029/30 than previously planned. If you include the effect of a bigger economy, total tax receipts are £38bn higher, but £12bn of that is simply more activity being taxed rather than higher tax rates.  
• The burden falls disproportionately on savers and investors. The headline surprise was an extra 2-percentage-point levy on investment income – covering property, cash savings and dividends – on top of the last budget's increase in capital gains tax and tighter limits on cash ISAs. This is a clear tilt against saving and investment.  

Government spending is higher, too. By 2029/30, it sits about £32bn above the spring forecast, and spending this year alone is now expected to be £23bn higher than the OBR previously thought. Tax receipts haven’t kept pace – they are only £2bn higher – so the deficit for this year is about £21bn larger. A chunk of that reflects the abandoned welfare reforms, and another chunk reflects higher local authority spending which no one seems able to explain properly.  

The welfare debate will make plenty of political noise, but it’s worth remembering that roughly half of the increase in the welfare bill comes from the state pension – more retirees, longer lives and the triple lock. That’s not going away.  

Despite all this, the current budget (taxes minus day-to-day spending, before investment) is still projected to move into surplus in 2028/29 and to reach a surplus of just over £20bn by 2029/30. Public sector net liabilities are expected to peak at about 84% of GDP in 2028/29 before edging down slightly.

From a purely fiscal-sustainability standpoint, this is not ideal but far removed from a crisis. The gilt market rallied quite well on the day with prices rising and yields falling.

A quiet but important tilt on inflation

Hidden among the big tax headlines were a few measures that actually help the inflation outlook:

• freezes on rail fares, fuel duty and prescription charges until next September;
• the removal of some green levies from household energy bills, worth around £150 per household next April and estimated to knock about 0.3 percentage points off CPI.  

These aren’t transformational, but they push in the same direction as the broader disinflationary trend. I still expect inflation to be close to the Bank of England’s target by the second half of next year.  

A very modest fiscal tightening, softening inflation and a central bank that is now clearly in rate-cutting mode are a supportive backdrop for gilts and for rate-sensitive parts of the equity market including in particular property, financials, and domestically exposed cyclicals such as housebuilders, building materials, retailers and other sectors exposed to discretionary spending. Smaller and mid-cap companies, which have borne the brunt of higher discount rates and tighter financial conditions over the past few years, should also be major beneficiaries.

The gilt market seemed to agree. After some initial volatility during the speech, ten-year yields ended the day around 4.4%, close to where they were before the recent wobble.

If you want to see how I’ve created my investment strategies for that backdrop in practice, take a look at W4.0 – it shows the strategies I have created, the holdings I have included in them, and the thinking behind them. For readers of Woodford Views, we’re offering 40% off the standard subscription for the first 50 people who join via this link. W4.0 doesn’t give personalised advice; it simply lets you see how I’m investing and decide for yourself what, if anything, to do with that information.

Where I part company with the OBR

Once again, I am struggling to rationalise many of the key assumptions underlying the OBR’s headline forecasts. Not only do they many of them look really odd, they also look internally inconsistent. This I believe is the product of an excessive reliance on an arcane model and the total absence of any judgement.

For example, after upgrading this year’s overall investment spending forecast, (public and private) by 2% to 2.75%, the OBR then assumes business investment falls in 2026 and then only grows by about 1% pa in real terms over the five-year period. This looks really odd and is inconsistent with, for example, more than 6% nominal growth in business investment this year. Quite why, when investment spending is at a 30 year high as a percentage of GDP, the OBR thinks that next year it falls in real terms is unfathomable.

If you believe we’re living through an AI-driven industrial revolution, with major capex commitments across data centres, networks, software and automation, those numbers simply don’t stack up. They read as if the UK has decided to sit out the next wave of technology-led investment altogether. That’s bonkers.

Secondly, the OBR continues to base its long-term growth view on what are, frankly, heroically bad assumptions about productivity growth that seem to ignore the potential impact of new technology. We can all argue about how big that impact will be but by implication pretending it doesn’t exist is not a serious forecasting strategy.  

Third, its interest-rate assumptions are, in my opinion, detached from reality. The OBR assumes that the interest rate on the stock of mortgage loans increases over the period to 5% (its currently well below 4%) and that the average ten-year gilt yield over the next five years will be 5.1%. Today, ten-year gilts sit just above 4.4%. Given that inflation is falling back to the MPC’s target next year of 2% and Bank Rate is following suit, and given that the OBR believes that growth remains subpar over the period at 1.5% pa, and that wage growth is slowing into a weakening labour market, quite why it thinks that interest rates will increase over this period is utterly perplexing..  

Falling inflation and lower base rates simply do not sit comfortably alongside permanently higher long-term yields.

My conclusion on all of this is that yet again the OBR will prove to be wrong, again, on almost everything. This time, my sense is that their buffoonery has reached an unsustainable level and my guess is that the zenith of their powers is now behind us, thank God. What is now becoming glaringly obvious, and the Chancellor’s speech hinted at this, is that there is a building scepticism about what the OBR is doing, its approach, its model, its complexity, its total absence of judgement and its conclusions.

A deliberate back-loading of tax rises

This brings us to what I think is the key to understanding this Budget.

I suspect the Chancellor shares at least some of my scepticism about the OBR’s pessimism. She cannot ignore its models – they effectively set the rules of the game – but she can choose when her tax measures bite.

That’s exactly what she has done. The big revenue-raising measures – the extra tax on investment income, freezing of allowances and, in time, the higher council-tax charges on expensive homes – are concentrated in the later years of the forecast period, particularly 2028–2029.  

If the economy grows just 0.25 percentage points faster on average than the OBR assumes – which would only take us back to the growth profile it was using in March – then the current budget surplus in 2029/30 jumps from around £20bn to roughly £47bn. That’s more than enough headroom to contemplate tax cuts or to abandon some of these planned increases altogether.  

My best guess is that many of the headline tax rises pencilled in for the back end of the decade will never see the light of day.

From an investor’s point of view, this matters because it reinforces a simple point: don’t anchor your long-term view on today’s budget scorecard. The politics – and the numbers – will move long before we get to 2029.

Will higher taxes kill growth?

In summary, this is a “tax and spend” Budget ultimately designed to quell a potential Labour backbench rebellion . By 2029/30, the tax take is projected to be about £80bn higher than it would have been without the Chancellor’s two Budgets, taking the tax share of GDP to just over 42% – a level we haven’t seen since the early 1980s.  

That has led many commentators to argue that the Budget is fundamentally anti-growth. Whilst I can see why they say that, for me it’s more of a missed opportunity. The Chancellor has fundamentally failed in both budgets to do something that would have helped the economy. Remarkably, here I actually agree with the OBR which said somewhere in the 203 pages, that none of the Budget’s measures will have a material effect on the economy’s longer-term potential.

Over the next few years, I expect the main drivers of UK growth to be:

1. Higher public spending, which is clearly what the government has chosen (I wish it had chosen a different path);
2. A continuation of strong business investment, particularly in technology, infrastructure and energy transition;
3. A recovery in household spending as inflation falls and interest rates decline households will save less and spend a more. Given that household consumption is about two thirds of the economy, this will be the most important driver.  

In that context, the design of this Budget may actually support consumption. By taxing investment income more heavily and reducing the attractions of cash ISAs, the Chancellor may well have nudged households away from saving and towards more spending.

So, despite all the noise, I am not changing my central view: UK growth should accelerate towards 2% next year, with momentum building into 2027.

What does it mean for markets?

For investors, I have three broad conclusions, albeit that none of these views has been altered by what was in the budget.

Gilts remain attractive

With inflation falling and with base rates following, possibly down towards 3% over time, and with a quantified issuance schedule, the environment for UK government bonds is in my view very positive across the maturity spectrum.  

Sterling has a fighting chance

I suspect that Sterling remains undervalued. I tend not to have as high conviction in currency calls as I do in equity and bond views, but my sense is that as the UK economy surprises to the upside, so the £ will continue to recover against the major currencies of the world.

UK equities still offer great value

The Budget will have no effect whatsoever on the outlook for UK corporate earnings. If I am right about the stronger medium-term growth outlook, UK corporates exposed to the domestic economy have much more upside. You can already see the early signs of that in companies like easyJet and Kingfisher, which have both reported this week and in both cases the numbers were robust, and their UK operations performed better than was expected.  

The bigger problem: the process itself

I suppose I should highlight where I do agree with the OBR, which has said in the volumes of arcane analysis and forecasting that none of the budget’s measures will have a material effect on the economy’s longer-term potential, but then if you’ve made it this far you will, if you agree with me, already know that.

The problem is not this particular Budget so much as the whole forecasting-led circus that surrounds it. When a small group of forecasters wield this much influence over fiscal policy – and when their models repeatedly err on the side of excessive gloom – the result is a system that, as Andy Haldane has argued, can “suck the life” out of the economy in the run-up to each statement.  

Moving to one major fiscal event a year is a step in the right direction. Much more fundamental reform is needed if we are to avoid repeating this self-inflicted nonsense year after year.

In summary

This Budget raises taxes on investors and savers, particularly towards the end of the decade, and nudges the UK further towards a high-tax, high-spend equilibrium. But it does not derail the recovery, nor does it justify the level of pessimism embedded in the OBR’s forecasts.

If anything, the combination of:

• improving near-term growth,
• falling inflation and interest rates, and
• a government that has deliberately back-end loaded many of its tax measures

creates a more supportive backdrop for UK financial assets than you would guess from reading the media.

For investors, the message is simple: ignore the theatre, focus on the underlying economics – and don’t let a single Budget knock you off a long-term strategy.