On Wednesday UK finance minister Rachel Reeves is expected to announce several tens of billions of pounds of tax increases, in a budget that is crucial for her credibility, both with the markets and with MPs, who are demanding higher social spending. One year after imposing £40bn in tax rises (the largest since the 1990s), Reeves is having to seek fresh revenues in the face of a projected deterioration in the country's economic outlook and a growing debt burden. "I will not return Britain to austerity," she said beforehand, promising to help households, cut hospital waiting times and keep debt under control.

A weakened government

Economists are expecting between £20bn and £30bn in new tax hikes, although this may prove insufficient to repair public finances, which have been weighed on by anaemic growth and mounting needs, notably in defence and in caring for an ageing population. Despite a growth forecast of 1.3% in 2025, the second-best in the G7 according to the IMF, the UK remains far from its pre-crisis pace (2.5%). Some analysts fear this budget could deepen fiscal uncertainty, holding back investment and growth, while weakening Reeves and even Prime Minister Keir Starmer, who has been struggling in the polls despite Labour's 2024 victory.

Since Liz Truss's mishaps in 2022, fiscal credibility has been a recurring issue, periodically shaking bond yields and the pound sterling, said Bruno Cavalier, chief economist at Oddo BHF. 

Taxes on luxury, electric cars and gambling

The budget could include a prolonged freeze on income tax thresholds, in breach of Reeves' pledges last year, as well as targeted increases: higher taxation on luxury property, gambling and electric vehicles. Tax incentives for pensions are also expected to be scaled back. This aims to carve out a more comfortable fiscal buffer, estimated at £17bn, compared with £9.9bn last year. However, several economists, including Mahmood Pradhan (Amundi), are concerned about the credibility of the OBR's forecasts, on which the entire plan rests. Any market doubts could reignite a spiral of rising yields, which are already high: 10-year UK government bonds are trading at 4.53%, well above Germany (2.67%) and France (3.41%).