The Budget
Chancellor Rachel Reeves MP delivered her second Budget on Wednesday 26 November, raising taxes, increasing day-to-day spending, and allowing borrowing to rise. Most policy measures were heavily trailed in advance, ensuring gilt yields remained stable on the day, the Chancellor’s core economic objective. The package received strong backing from Labour MPs and trade unions, while support from the UK business community was noticeably muted.
Snapshot:
The Budget was aimed at Labour MPs, not voters, who don’t return to the polls for another three years.
Short-term political stability came at the expense of structural reform, as the Government gears up for February 2026, where it will need parliamentary support for its new legislative priorities outlined in the King’s Speech.
Labour is becoming increasingly left-wing, but this is unlikely to stop its voters moving to the Greens or Liberal Democrats in the short term.
Higher taxes and tighter restrictions will weigh on growth. Further tax rises will likely come to fill fiscal deficits.
Key takeaways:
The Budget was designed to neutralise internal Labour Party unrest, not address economic weakness
After months of trailing Reform UK in the polls and facing historically low approval ratings, the Chancellor and Prime Minister crafted this Budget primarily for their restive backbench MPs rather than the public. A 2023 rule change enables 20% of Labour MPs to trigger a leadership contest, which, combined with a reshuffle that promoted few backbench MPs, had begun to prompt questions over Starmer’s authority.
Targeted giveaways, namely freezes to rail fares and prescription charges, and higher taxes on the wealthy, shareholders, and asset owners, were announced to directly cater to the Labour benches. These measures have successfully reduced the immediate threat of further parliamentary rebellion and give Starmer temporary breathing room heading into the 2026 legislative programme, which will likely take the government further to the economic left.
Labour’s leftward fiscal turn will not stem their voters’ continued drift to the Liberal Democrats and Greens
Despite raising taxes and spending by nearly 2 percent of GDP since taking office, the Government has struggled to communicate this left-leaning shift to its own supporters. Early U-turns on benefits and pensions reforms, ambiguous policy on the Israel/Palestine conflict, along with a heavy communications focus on restricting illegal immigration to compete with Reform UK, have created the perception of a centrist or even centre-right government.
This dissonance will continue to push Labour-leaning voters toward the left-wing Greens and centre-left Liberal Democrats, even as the government’s economic policy will overly benefit Labour voters. Snap polling from YouGov shows 56% of voters expect the Budget to worsen their personal finances and 67% expect it to weaken the economy, further eroding Labour’s economic credibility. Some non-partisan media outlets openly questioned how Labour will be able to restore trust ahead of the next election, a question not usually faced so early in a government’s tenure.
Tax rises and regulatory tightening will weigh on growth and employment
To avoid breaching Labour’s manifesto pledge on income tax, Reeves relied on a mix of broad-based and highly targeted tax rises.
Broad-based measures:
Freezing income-tax thresholds for several more years, dragging more earners into higher bands through fiscal drag.
Leaving in place marginal tax cliffs above 60%, dampening incentives to work and invest.
Targeted measures:
Higher taxes on high-value property, property income, and dividends.
Tighter limits on salary-sacrifice pension contributions.
Earlier increases in employment taxes and forthcoming labour-market regulation under the Employment Rights Bill.
Together, these measures will continue to suppress hiring of full-time employees, particularly for new labour-market entrants, where the jobseeker-to-vacancy ratio is at its highest level since 2015. The Institute for Fiscal Studies expects real disposable income growth of only 0.4% per year for the rest of the Parliament, while the OBR has cut GDP growth expectations to 1.5% through 2029.
The Conservatives continue their subdued approach to opposition
The Conservatives attacked most measures in the Budget but still lack economic credibility after 14 years in office and overseeing Brexit. Their current strategy of low-intensity opposition is designed to leave Labour fully owning policies that are fracturing its electoral coalition. Paired with Nigel Farage’s recent moderation on economic and fiscal issues, the Conservatives hope to position themselves before the next election as the moderate centre-right party of lower taxes and a more measured approach to immigration.
Outlook: short-term political stability but slower growth
This Budget delivers short-term political stability for the Chancellor and Prime Minister but at the cost of a weaker medium-term economic and employment outlook. Higher taxes, tighter regulation and the absence of meaningful supply-side reform will continue to restrain growth, deter investment, and weaken labour-market performance.
The Government’s political priorities and its economic requirements are now pulling in different directions. Without a coherent plan to raise productivity, expand housing and restore credible tax incentives, the UK risks a prolonged period of low growth and rising fiscal pressure. Politically, Labour’s effort to reassure its parliamentary Left while appealing to voters drawn to Reform UK is creating tensions that will deepen, not contain, the country’s growing fragmentation.