Doing the bare minimum at the Budget would risk another fiscal groundhog day next year - A £22billion problem

16th October 2025

The Chancellor almost certainly has a fiscal repair job on her hands at the Budget on 26 November.

Using the Barclays central forecast for the economy, we estimate that the Chancellor could see something like a £22 billion downgrade to the borrowing outlook for 2029-30 - of which £6 billion results directly from reversing recent and planned cuts to social security spending.

This is the size of fiscal adjustment that would be required to restore the £10 billion of headroom against her borrowing rule that Rachel Reeves chose in the spring. The precise numbers are sensitive to forecasting judgements – and the Office for Budget Responsibility (OBR) will undoubtedly make different ones. A larger, or smaller, official downgrade is entirely possible. But our judgement is that a sizeable fiscal consolidation will be required for Ms Reeves to continue to meet her ‘iron-clad' rules.

This is among the headline findings of the IFS Green Budget 2025, funded by the Nuffield Foundation and produced in association with Barclays.

For the Chancellor, this presents a set of interlinked choices:

First, should the fiscal consolidation come through spending cuts, tax rises or both?

The key thing is ensuring that any planned consolidation is credible. This is particularly important from a bond market perspective and will, in part, determine the price at which investors are willing to lend to the government.
Finding deliverable spending cuts may pose challenges, not least due to the lack of support in parliament for social security cuts, and the fact that multi-year departmental budgets up to 2028–29 were agreed only in June. Pencilling in unspecified spending cuts solely for 2029–30 would lack credibility. Announcing and then failing to deliver cuts might be the worst of all worlds. But Barclays highlights that a credible attempt to reduce spending would be one way to demonstrate to market participants that the government has the political will and ability to deliver on its fiscal objectives.

If looking to tax rises, the specifics matter. Seeking large sums from a small number of taxpayers would be risky. A Budget focused purely on immediate politics could prove considerably worse on the economics. The Chancellor should be bold and take steps towards a simpler, more rational tax system that does less to impinge on economic growth. Barclays analysis also warns that if tax rises are seen to be inflationary, they could lead to interest rates remaining higher for longer and a weaker near-term economic outlook.

Second, how large should any consolidation be?

Continuing to leave minimal headroom against pass–fail fiscal rules leaves the Chancellor highly exposed to global economic turbulence and run-of-the-mill forecast downgrades. This in turn leads to overly frequent and overly rushed policy adjustments. This is a bad equilibrium. It is also a policy choice.

If Ms Reeves wants to reduce the chances of a fiscal groundhog day scenario – i.e. finding herself in a similar bind at her next fiscal forecast – then implementing a larger fiscal consolidation in order to build in a larger amount of headroom, is the most straightforward route. It would help to secure policy stability and to reassure those lending to the government, but would have the unavoidable downside of requiring larger tax rises or spending cuts.

Third, are changes to the fiscal framework required?

Instead of – or as well as – increasing headroom, the Chancellor could legislate so the Office for Budget Responsibility only produces one forecast a year in the pursuit of policy stability, and adjust the fiscal framework accordingly. This would have the benefit of simplicity, but would be the fiscal equivalent of throwing the baby out with the bathwater – sacrificing transparency, and ending half a century of (what the International Monetary Fund describes as) best practice. Nor would it prevent the Chancellor from finding herself in a similar fiscal bind in a year's time.

Other options – such as expanding the use of ranges on the fiscal rules – have attractions and could also be promising avenues, but would require careful communication to avoid being interpreted as a backtracking on fiscal discipline.

Analysis by IFS authors additionally highlights that:

It is widely expected that the Office for Budget Responsibility will downgrade its productivity forecast. As a rule of thumb, we might expect each 0.1 percentage point downgrade to the annual productivity growth rate to increase public sector net borrowing by £7 billion in 2029–30.

Under the Barclays central scenario, and without a fiscal tightening, the government would also miss its second fiscal rule – to have debt falling as a share of national income in 2029–30 – by £17 billion.

Barclays analysis additionally highlights that:

In terms of fiscal fundamentals, the UK is by no means an outlier internationally: it is ‘middle of the pack’ on traditional measures of debt and deficits, and UK borrowing is projected to fall by more than in any comparable economy over the coming years.

All the same, markets are being asked to absorb unusually high volumes of gilts compared with recent years. A combination of high levels of net issuance and Bank of England asset sales means that private sector gilt holdings are set to increase by an average 6% of GDP over the next four years, more than twice the average between 1999–2000 and 2019–20. This is one reason yields have gone up.

While official data suggest that employment growth has been strong, an assessment of the broader evidence points to a weakening labour market. Barclays expects unemployment to increase to more than 5% in early 2026, and expects wage growth to slow further. Despite this, Barclays expects the economic inactivity rate to remain low by the standard of recent decades.

UK inflation is currently above target and higher than in comparable economies. This is particularly problematic as it makes members of the Monetary Policy Committee of the Bank of England hesitant about voting for Bank Rate cuts. Barclays judges that around 0.2 percentage points of inflation is from April’s increase in employer National Insurance contributions; while a larger chunk is from energy prices, food prices, other tax changes, and regulated prices.

Barclays expects inflation to return back to the 2% target by the second quarter of 2026, and therefore quarterly cuts to Bank Rate should be implemented to bring it down to around their view of its neutral rate of 3½% in early 2026.
Helen Miller, Director of IFS, said:

‘Last autumn, the Chancellor confidently pronounced that she wouldn’t be coming back with more tax rises; she almost certainly will. For Rachel Reeves, the Budget will feel like groundhog day. This is, to a large extent, a situation of her own making. When choosing to operate her fiscal rules with such teeny tiny headroom, Ms Reeves would have known that run-of-the-mill forecast changes could easily blow her off course.

‘A key challenge is ensuring that fiscal groundhog day doesn’t become a twice-yearly ritual. There is a strong case for the Chancellor to build more headroom against her fiscal rules. That wouldn’t be costless – but nor is limping from one forecast to the next under constant speculation that policy will be tightened again. Persistent uncertainty is damaging to the economic outlook.

And constant obsession with the headroom distracts from important debates and challenges, such as how government policy could bolster economic growth, how the tax system should be reformed, and how public services can be delivered more effectively. Devoting more time and attention to those questions would be better for us all.’

Jack Meaning, Chief UK Economist at Barclays, said:

‘The Chancellor faces a difficult economic backdrop as she prepares for the upcoming Budget. Growth is slowing, unemployment is rising, and inflation remains above both the Bank of England’s 2% target and comparable rates among our international peers. Against this backdrop, the Chancellor must find a fiscal consolidation to satisfy her own fiscal rules, without derailing the growth agenda or losing the confidence of the markets.

‘With the right policy decisions, this near-term challenge can be navigated toward a more favourable medium-term outlook. If the Chancellor can avoid delivering an inflationary Budget, headline price growth should ease significantly in the coming months, allowing the Bank of England to cut interest rates further and support households and businesses in driving more balanced economic growth.

‘If the Chancellor can continue to prioritise productivity, the UK will be better positioned to achieve sustainable medium-term growth and deliver meaningful improvements in living standards. The path to these outcomes is narrow and beset with risks on both sides. Global markets, along with households and businesses across the UK, will be watching closely on 26 November and hoping the Chancellor finds the right track.’

Mark Franks, Director of Welfare at the Nuffield Foundation, said, "The choices the government makes in the upcoming Budget will have implications that go far beyond issues of fiscal arithmetic. They will directly affect people’s lives, their well-being, and the resilience of public services over the years ahead. The fragile state of the economy and the public finances makes it even more important to think long-term, act strategically, and put people at the heart of fiscal policy.’

Issued by The Institute for Fiscal Studies

Authors
Carl Emmerson Moyeen, Islam Jack Meaning, Helen Miller, Nick Ridpath, Isabel Stockton,

Published on 16 October 2025