UK Budget: Near-term giveaways, medium-term takeaways; still difficult decisions ahead

The UK Budget offers modest near-term support while preserving fiscal consolidation, but leaves substantial and politically difficult decisions ahead.

• Compared with the March plans, the measures add £7.6bn of near-term support, mainly through temporary spending increases and tax cuts, but deliver £7.4bn of net tightening by 2031-32.
• The fiscal headroom has fallen to £15bn, while borrowing is £18bn higher in 2026-27, £16bn higher in 2027-28 and around £11bn higher annually thereafter than in the March forecast.
• The OBR expects GDP growth of 1.25% in 2026 and 1% in 2027, with inflation peaking at 3.8% in 2027 Q1 before returning near the 2% target in 2028; the budget is forecast to lower inflation by 0.22 percentage points at its peak in 2027 Q2.
• Fiscal consolidation is projected to move from a cyclically adjusted primary deficit of 0.3% of GDP this fiscal year to surpluses of 0.5% next year and 1.7% in 2031-32, while the probability of meeting the budget rule has fallen to 56%.
• Defence spending of 3.5% of GDP by 2035 remains unfunded, requiring around £35bn annually in 2026-27 terms, and preventing real day-to-day departmental spending from falling would require an additional £11bn in 2031-32.
• Gross gilt issuance for 2026-27 was raised from £246.2bn to £250.6bn, with issuance shifted away from longer maturities; the fund manager has reduced the preference for 30-year gilts and now favours five-to-seven-year maturities.

Takeaway: The budget may keep bond markets broadly onside in the short term, but its limited headroom, higher borrowing and deferred spending decisions leave gilts and the fiscal outlook vulnerable to energy, growth, labour-market and borrowing-cost shocks.