By Gemma Knight | November 26, 2025
The anticipation surrounding Chancellor Rachel Reeves' inaugural Budget is less about radical innovation and more about predictable fiscal consolidation. The market is demanding clarity, confidence, and a credible path to deficit reduction after years of unprecedented public spending.
The stakes are high: the performance of UK Gilts and the trajectory of the Pound (GBP) will depend entirely on whether the Chancellor holds two critical "Red Lines."
The primary driver for UK asset stability is the government’s commitment to stabilizing its debt-to-GDP ratio. The Chancellor is walking a tightrope: balancing austerity demands against the political necessity of supporting key public services.
Prediction: Targeting the Debt
Reeves will announce aggressive, front-loaded spending cuts—likely focusing on capital expenditure and operational efficiencies in non-core departments—aimed at delivering a significant near-term reduction in borrowing. We expect a stated commitment to reducing the fiscal deficit by at least £20 billion over the next three years.
Market Impact on Gilts
If the market perceives the $\mathbf{£20}$ billion target as credible and the plans are detailed, it will be interpreted as a strong signal of debt manageability. This would immediately lower the risk premium on UK Gilts, leading to falling Gilt yields and a corresponding rise in their price. A surprise shortfall (e.g., less than $\mathbf{£15}$ billion in cuts) would send Gilts sharply lower.
While tax increases are inevitable to meet fiscal goals, the Chancellor must avoid measures that cripple corporate investment or signal an anti-business posture.
Prediction: Stealth Taxes vs. Direct Hikes
We anticipate the avoidance of major, headline-grabbing tax increases on Corporations (CT) or Income Tax (IT). Instead, the focus will be on "Stealth Taxes"—such as restricting capital gains allowances, raising levies on financial transactions, or extending the current windfall tax regime on energy producers.
Market Impact on FTSE
The FTSE 100 will react positively if the Corporation Tax rate remains unchanged or is only marginally raised (e.g., a 1-point increase). The market will view the avoidance of aggressive tax hikes as a relief, providing a short-term boost, especially to domestic-focused stocks. Any punitive, sudden tax on financial services, however, would hit the index hard.
The Pound's reaction will be dual-pronged, driven by both Gilt yields and the implications for the Bank of England (BoE).
Prediction: Short-Term Strength
A budget that is deemed fiscally responsible (i.e., achieves the Gilt stability goal) will be positive for the Pound in the short term. Lower Gilt yields reduce government borrowing costs, which is fundamentally stabilizing.
The Crux: BoE Independence
The Chancellor must not be seen to interfere with the BoE’s mandate. If the Budget fails to deliver credible cuts, the BoE will be forced to keep rates higher for longer to compensate for the inflationary pressure of excessive government borrowing—a long-term negative for economic growth and eventually the Pound.