WeekWatch - 01/12/2025

Initial Budget response from investors was positive

Of the four key groupings the Chancellor had to satisfy in the Autumn Budget (party, electorate, business and the market), only the market’s response can be precisely measured. On that basis she appears to have passed the test. Closing out November, important domestic financial indicators such as government bonds (gilts), the pound and shares all finished higher.

Chaotic start broke the cardinal rule, ‘no surprises’

It was a messy start to Budget day. The unintentional early release of the Office for Budget Responsibility’s (OBR) fiscal forecast broke the cardinal rule in financial markets, ‘no surprises’. This caused gilt yields to yo-yo (yields and prices move in opposite directions). Yet by 28 November, the yields on UK government bonds had fallen to their lowest level for the week. Although it was a relatively modest drop, it seemed investors were prepared to give the government’s fiscal plans the benefit of the doubt. More helpfully, lower gilt yields also meant the UK government was paying a lower interest rate on its borrowings.

The OBR to the government’s rescue?

Greg Venizelos, fixed income strategist at SJP, notes this easing in gilt yields was “likely a reflection of the fact the OBR’s upward revision in the fiscal headroom to £22 billion reduces the near-term risks associated with possible macro-economic shocks”.

The slight strengthening in sterling following the Budget could be seen as a further sign investors were prepared to take a ‘glass half full rather than half empty’ approach.

Greg flags the chances of a December rate cut by the Bank of England have increased to over 90%, suggesting this is almost a done deal. Such a move will be helped along by the OBR forecast that domestic inflation is set to slow to 2.5% in 2026.  According to Greg, “it’s worth noting this probability jumped from below 40% to over 70% on 6 November, when the Chancellor made a speech hinting at income tax hike”.

From fiscal hole to fiscal surplus (or from the red to the black)

James Heal, Director of Public Policy at SJP, notes that: “The Chancellor managed to walk a difficult tight-rope on the day, but some of the relief on the day may have already evaporated. There is now a strong media and political focus on the strong pre-Budget signalling of a fiscal black hole (thereby justifying some of the difficult decisions taken) which turned out to be a small surplus.

A relief rally by UK shares

UK shares had a good week. The domestically-focused FTSE 250 rose more than 3% over the week. The FTSE 100 also ended in the green.

Expectations that interest rates are set to ease helped rate-sensitive beneficiaries, that is those whose earnings are helped by lower borrowing costs. This included banks; utility companies, electricity and gas providers with high levels of borrowing; as well as property companies and notably housebuilders, reflecting a suspected pick-up in mortgage demand. Some consumer-facing sectors such as retail and hospitality rose, reflecting apparent relief they were not targeted more harshly. In contrast, there was weakness in the gaming sector following the higher taxes announced in the Budget.

UK growth downgraded

Market reaction to the Budget was not unconditional. Commentary - and critics - have focused on the impact it may have on economic growth and whether it goes far enough. Concerns were expressed that in the long run, it could have more tax implications further down the road.  

The macro picture also appeared dim. The OBR downgraded its productivity forecast, which will result in lower economic outlook from next year. Greg says “while the Budget managed to smooth market anxieties, at least in the short and medium term, we remain cautious due to the longer-term fiscal concerns”.  

AI and hopes of a rate cut support US shares

In the US, shares rose strongly despite the shortened trading week due to the Thanksgiving holiday. Investor sentiment appears helped by revived talk of a US interest rate cut later this month.  AI-related shares also rallied. This helped the S&P 500 recover from a poor start to November and finish with a 0.1% gain over the month. In contrast, the technology-focused Nasdaq index delivered a negative monthly return for the first time since March.

Continental European shares also rose. Notes from the European Central Bank’s October meeting highlighted the eurozone was in a good place, with inflation remaining near its 2% target. That is below the level this time last year.       

After months of speculation and an early release from the Office for Budget Responsibility, the measures announced in the Autumn Budget were perhaps not as drastic as many had predicted. But changes on the horizon are likely to be felt across most UK households over the coming years.

As the dust settles in the next few weeks, there will be further clarity on who the winners and losers are. For now, here are some of the main reforms announced in the Budget:

Freezing income tax thresholds

The decision to freeze income tax and national insurance contribution (NIC) thresholds for a further three years (to 2031, beyond the next general election) is expected to raise £23 billion for the government. The so-called fiscal drag will see many more people pulled into paying higher-rate tax.

Increasing savings income tax

From April 2027 savings and property income tax will rise by two percentage points for each band of taxpayers. This will see the rate rise to 22% for basic rate taxpayers, 42% for higher rate taxpayers and 47% for additional rate taxpayers. There will be a similar increase in tax on dividend income from April 2026, however, this will apply only to basic and higher-rate taxpayers.

Reducing the cash ISA allowance

As expected, the annual cash ISA allowance will be reduced from £20,000 to £12,000 from April 2027. This will only apply to savers aged under 65.

NICs on pension salary sacrifice contributions

Those paying into their pension through salary sacrifice will start paying national insurance on contributions above £2,000 a year, from April 2029. Employers will also pay NICs on such contributions.

Mansion tax

Homeowners with properties valued at £2 million or more will face a council tax surcharge, from April 2028. The ‘mansion tax’ will see annual charges of between £2,500 and £7,500 levied, depending on the value of the property.