Market Perspectives: UK Budget 2026: The consequences

The UK Budget is a holding exercise, leaving growth, welfare, defence funding and fiscal sustainability dependent on decisions still to come.

• The OBR forecasts UK GDP growth of 1.2% in 2026 and just 1.0% in 2027, rates the author considers insufficient to relieve fiscal pressures.
• Fiscal headroom has fallen to around £15 billion, roughly half its average since the global financial crisis, although lower borrowing costs could improve it.
• The deficit is projected to decline to 1.8% of GDP by the end of the decade, but much of the required adjustment has been deferred to next year’s Spending Review.
• Welfare spending is expected to rise by around £100 billion to approximately £431 billion in 2031-32, while annual debt interest costs are forecast to reach £160 billion.
• The government’s 3% of GDP defence-spending target remains unfunded, while closer EU ties and the Prime Minister’s forthcoming ten-year plan could affect the UK’s longer-term growth potential.

Takeaway: Investors should focus less on this market-neutral Budget than on next year’s Spending Review, welfare reform, defence funding, EU policy and the ten-year growth plan, with limited fiscal room for error if borrowing costs rise.