Key points
The OBR forecasts £15bn of headroom in 2029-30, £7bn less than at the 2025 Budget, with only a 56% chance of meeting the fiscal rule.
CPI is expected to peak at around 3.8% in early 2027 and average 3.4% next year, well above the Bank of England’s and consensus forecasts. The OBR assumes Bank Rate rises to just over 4.25% by mid-2027.
Plans to limit cash ISA subscriptions to £12,000 for under-65s will not go ahead, and a new starter ISA for first-time investors is under consultation.
The initial market reaction to the Budget was relatively muted, both in equities and bonds.
Sarasin view:
“The Chancellor delivered a relatively uneventful Budget that defers the major decisions to 2027. While the policy measures themselves were modest, the underlying fiscal position deteriorated due to higher energy prices. This is the third consecutive year in which borrowing, spending and taxes have all increased meaningfully. Borrowing exceeds the March forecast in every year because spending, led by debt interest, has been revised up by more than tax receipts. The Government remains within its borrowing rules, but with a narrower safety margin than in March.”
Adam Hamilton, Economist
OBR forecast: inflation up, headroom down
In its Economic and fiscal outlook, published alongside Chancellor John Healey’s Autumn Budget 2026, the Office for Budget Responsibility (OBR) described the UK’s economic and fiscal position as “very challenging”. Repeated adverse shocks have contributed to weak GDP growth and elevated government borrowing. Growth for this year has been nudged up to 1.2%, but the 2027 forecast has been cut by half a percentage point to 1% as higher energy prices and interest rates weigh on activity.
Consumer Prices Index (CPI) inflation is expected to average 3.1% this year, around three-quarters of a point above the March forecast. It is then forecast to peak at around 3.8% in early 2027 and average 3.4% next year. That is well above the Bank of England’s July forecast of 2.8% for 2027, and the OBR’s forecast assumes the Bank of England base rate rises to just over 4.25% by mid-2027.
With gilt yields reaching multi-year highs this year, Healey was always likely to prioritise fiscal discipline. The OBR forecasts fiscal headroom, the margin by which the government is expected to meet its fiscal rules, of £15bn in 2029-30. That is £7bn less than at the 2025 Budget. It is a slim cushion: the OBR puts the chance of meeting the rule at just 56%, and the margin is well below the average of close to £30bn held by Chancellors since 2010. Borrowing is forecast at 4.2% of GDP (£133bn) in 2026-27, falling to 1.8% (£67bn) by 2030-31. It is higher than the March forecast in every year: by around £18bn in 2026-27, £16bn in 2027-28 and an average of £11bn a year thereafter. The OBR also confirmed that debt interest costs are set to rise from £109bn in 2025-26 to £160bn by 2031-32.
ISAs spared, income taxed harder
The Chancellor confirmed that plans to limit cash ISA subscriptions to £12,000 of the £20,000 annual allowance for under-65s, as announced a year ago by his predecessor Rachel Reeves, will not go ahead. He will also consult the investment sector on a new “starter ISA” to reward first-time investors, though details were scant.
In line with pre-Budget reports, there was no change to headline Capital Gains Tax (CGT) rates or to stamp duty. However, Healey announced that tax rates on savings and property income will rise by a further 2 percentage points from April 2027, on top of the increase of the same amount announced at the 2025 Budget. This takes the basic, higher and additional rates to 24%, 44% and 49% respectively. The OBR expects some savers to shift more of their money into ISAs in response, and warns that the higher property income rates are likely to push up rents over time.
There were also targeted changes to the taxation of business owners. The lifetime limit for Business Asset Disposal Relief will be halved from £1m to £500,000 from April 2027, while a new 10% CGT rate will apply to qualifying founders of high-growth or innovative companies from the same date. From April 2028, reforms to the taxation of company distributions aim to stop owners extracting profits at CGT rates rather than dividend rates.
Banks will face a temporary increase in the bank surcharge – an extra corporation tax on banks’ profits, charged on top of the standard rate – from 3% to 6%, running from 1 January 2027 to 31 March 2028. Meanwhile, income tax thresholds remain frozen until April 2031, which the OBR identifies as a key driver of the UK’s tax burden reaching a record high.
The issues to watch
A narrow margin against significant pressures. The OBR forecast assumes a fuel duty rise postponed five times before, real-terms cuts to unprotected services from 2028 that the OBR expects to be reversed, and a final-year spending total not yet agreed with departments.
Energy and interest rates. Oil and gas prices are assumed to fall, which is sensible but uncertain. Higher energy prices raise inflation, the cost of inflation-linked debt and indexed benefits. Separately, a one percentage point rise in borrowing costs would cost roughly the whole safety margin, so the bond market and the fiscal plans now constrain one another.
A third consecutive year of higher borrowing, spending and taxes. The policy changes are modest, but the rise in borrowing is substantial and stems from energy-driven inflation that lifts debt interest and welfare costs. The Chancellor can only redistribute the burden, and this Budget shifts it towards savers, landlords, banks and companies to fund household relief.
Relief rather than reform. The Budget does not right-size spending to fund defence, improve the regulatory environment for private investment, or move the tax mix towards less distortive bases. Each crisis has added to the national debt and reduced the capacity to respond to the next; this package does not change that.
Deferred decisions. Tax increases fall on savings, property income, bank profits and investment allowances. Departmental budgets, the path to 3.5% of national income on defence, social care reform and devolved tax arrangements all await the 2027 spending review.
For more information about how the Budget may impact your investment portfolio, speak to your Sarasin representative.
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