The Autumn Budget is fast approaching, and speculation is building over which taxes chancellor Rachel Reeves will target to raise revenue and fill the estimated £22 billion government shortfall.
Speculation had been rife that Reeves could break a key election pledge and raise income tax. Plans to do so appear to have been scrapped, ostensibly following estimates that the fiscal black hole is £10 billion smaller than previously thought.
The U-turn shifts the Treasury’s focus towards other measures such as scrapping pension salary sacrifice, cutting pensions tax-free cash, or overhauling property taxes.
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Budget day – 26 November – is just days away and will reveal more about specific tax rises.
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“It’s reasonable to think that there’s going to be tweaks on things like capital gains tax (CGT) and on property taxes,” said Ken Wotton, lead manager of Strategic Equity Capital.
But what impact will the Budget could have on inflation and interest rates - and what does it mean for your portfolio?
How could the Autumn Budget affect UK inflation?
There’s speculation the chancellor could scrap VAT on energy bills, which would give households struggling with the cost of living some breathing space. It would also have the twin advantage of bringing down inflation, which fell to 3.6% in the year to October.
Ruth Gregory, deputy chief UK economist at the consultancy Capital Economics, comments: “We think the Budget is more likely to lower inflation than raise it. The chancellor has suggested she will avoid raising taxes that directly boost inflation. Scrapping VAT on utilities would subtract 0.2 percentage points from CPI inflation for 12 months.
“And by weakening the economy, the fiscal tightening will pull down on inflation in the medium term.”
John Wyn-Evans, head of market analysis at the wealth manager Rathbones, agrees that removing VAT from energy bills would ease inflationary pressures.
He adds: “Any offsetting tax rises - such as higher income taxes or further freezes to tax thresholds - could dampen household spending power, indirectly supporting the inflation downtrend. Overall, the Budget is unlikely to reignite inflation and may even help bring it down further if fiscal tightening outweighs any stimulative measures.”
Thomas Pugh, chief economist at tax and consulting firm RSM UK, comments: “It seems like the chancellor wants to avoid a repeat of last year’s policy-induced inflation. To do that she will have to focus on taxes like on income and property, and stay away from big increases in duties, employers’ National Insurance contributions (NICs) and VAT.”
How could the Autumn Budget affect UK interest rates?
Many people, especially first-time buyers and those remortgaging, will be hoping that the Bank of England will cut interest rates soon, and that mortgage rates will follow suit.
On 6 November, the Bank held rates at 4%, as widely expected. But, rates could be cut soon, depending on the contents of the Autumn Budget.
Wyn-Evans tells MoneyWeek: “With inflation cooling, the Bank of England will have more room to consider interest rate cuts. If the Budget is perceived as fiscally responsible - focusing on tax rises or spending restraint rather than giveaways - it could reinforce expectations of lower rates.
“However, any signs of fiscal slippage or overly optimistic growth assumptions could have the opposite effect, pushing up borrowing costs.”
Pugh notes that if the budget is as deflationary as the chancellor has hinted at, “it does raise the chances of a rate cut in December”.
Check out the next dates for Bank of England base rate meetings.
Robert Salter, director of the accountancy firm Blick Rothenberg, says it’s not clear the Budget will lead to any drop in the base rate in the short term.
He tells MoneyWeek: “If Reeves were to raise any of the ‘sales-based taxes’ – particularly VAT, but also fuel duty or alcohol and tobacco duties - significantly in the Budget, those changes would actually feed through into inflation and potentially make it more difficult for the Bank of England’s monetary committee to reduce interest rates in the coming months.”
How could the Autumn Budget affect the UK economy?
Capital Economics is expecting a bumper Autumn Budget full of tax hikes worth about £38 billion, “which will trim GDP growth”.
Gregory says: “Such tax rises would be almost as big as Reeves’ first Budget when taxes rose by £41.5 billion. These two Budgets would be the biggest tax haul at successive major fiscal events since Denis Healey’s Budgets in 1974-1976.”
So, what does this mean for economic growth? Capital Economics suggests that the net fiscal tightening could reduce its GDP forecast by 0.3% in total, with 0.2% of that hit occurring in 2026.
“That’s unlikely to trigger a recession, but it might mean that instead of growing by 1.2% next year, GDP rises by 1%. The damage would be bigger if consumer confidence plunges, the policies hit households all at once, or if many minor taxes are raised rather than a few big ones,” explains Gregory.
The Office for Budget Responsibility is expected to downgrade long-term growth forecasts at the Budget due to weak productivity. The forecasts could fall from between 1.7% and 1.9% for annual GDP growth between 2026 and 2029 to a range of 1.2% to 1.4%, according to Capital Economics.
Salter points out a couple of ways the Budget could potentially affect economic growth.
He says the rumours in the long lead-up to the Budget are causing some companies to postpone business investment decisions and hiring additional staff. “Hopefully, however, these are only temporary blips and these decisions can come back ‘online’ once the Budget has been announced and employers actually have a clearer understanding of the government’s plans for both taxes and the wider economy.”
This, in turn, could boost UK growth.
On the flipside, the possible introduction of an “exit tax” – whereby wealthier taxpayers could be liable to a UK tax charge on unrealised capital assets if they become non-UK tax resident – has encouraged some wealthier taxpayers to leave the UK prior to the Budget in an attempt to avoid any such possible charge, says Salter.
“Those individuals who are doing this are often quite wealthy entrepreneurs and business owners. Hence, there is a real risk that if they do emigrate, they cease to continue investing in their UK business operations. Needless to say, any such developments would undermine the UK economy and the government’s stated goal of ‘going for growth’ from an economic perspective,” he points out.
What could the Autumn Budget mean for investors?
So, the Autumn Budget could potentially open the door to interest rate cuts, but may also act as a headwind for growth.
But, what does it mean for financial markets and for investors?
Wyn-Evans points out that the FTSE 100 is less sensitive to domestic policy, given its global earnings base, so may not be particularly impacted by the Budget.
“However, the pound, government bonds, and smaller UK-focused companies will react more directly. A credible Budget that reassures investors about the UK’s fiscal path could be a ‘clearing event’ for sentiment, potentially supporting equities and gilts,” he says.
Wotton also thinks that UK equities could see a relief rally if the Budget turns out to be better than expected.
“Sentiment around what’s coming [in the Budget] is really very negative,” he said. “The temperature checking with company management teams that I talk to is extremely negative, particularly people in consumer-facing sectors… the expectations are very low.
“So actually, if things don’t come in any worse, and maybe if there is a sprinkling of positive measures to support the stock market or investing… that might prove to be a positive catalyst for the stock market.”
Gregory predicts that gilt yields and the pound are more likely to fall rather than rise after the Budget for three reasons.
“First, if the Budget weighs on GDP and inflation as we expect, that could reduce market interest rate expectations and weigh on gilt yields and sterling. Second, a bigger amount of headroom and a smaller budget deficit would be viewed positively by investors," she says.
“Third, immediate tax hikes would be more credible than spending cuts that look politically unachievable or are so far in the future that they are unlikely to materialise.”
Of all types of investment, Wotton believes that property is the most potentially exposed to the impact of the Budget.
“You’ve got potentially a higher cost of [property] ownership,” he says. The housing market has already stalled in anticipation of the Budget, so property tax increases could further dampen this momentum.
