Only two more sleeps until it’s finally Autumn Budget day! Budget day itself is usually a bit of a damp squib. All the juicy details are usually known well before the event. This time might be different. The flip-flopping, U-turning and general chaos of the last couple of months means we are much less certain of what to expect on Wednesday than usual.

This raises three issues. First, chaos has a cost. The recent economic data make it clear that worries about the Budget is dragging on growth. Second, uncertainty raises the chances of an adverse reaction in gilt markets on the day if the Budget disappoints. Third, the chances of additional rate cuts next year are falling quickly because it looks like the Budget will be less deflationary and more backloaded.

Given the endless speculation about huge tax rises, we’d been surprised at how resilient most of the data was in the run-up to this Wednesday. That came to an end with Friday’s data dump. Retail sales volumes slumped in October and consumer confidence dropped in November. The composite PMI, which is the most closely followed early measure of business activity and sentiment, lurched down as well. Throw in a drop in house prices, especially in London, and it paints a pretty clear picture of an economy that has essentially frozen ahead of the Chancellor’s Budget announcements.

In theory, this activity should be delayed, not cancelled. Clothes not bought in October could be bought in December and business investment postponed could be triggered once the outlook is clearer. Indeed, activity postponed from before last year’s Autumn Budget being pushed into Q1 was one reason why growth that quarter was so strong.

However, there are still two more risks. First, Q4 growth might slump. Given growth in Q3 was just 0.1% q/q, there’s a fair chance that the economy flatlines in Q4 or even contracts, even if it rebounds in Q1. The second risk is that activity is cancelled, rather than just delayed. This is especially likely if large tax rises mean households want to save more and businesses deem projects no longer make economic sense. In this case, growth and activity in the first half of 2026 could look pretty depressed as well.

What to expect on UK Budget Day

Turning our attention to the event itself, assuming there’ll be no more U-turns in the next two days, we still expect a tax-raising package of around £30bn. About half of that will probably be raised through a combination of fiscal drag and spending freezes in 2029–30. That leaves £15bn to be raised through a smorgasbord of smaller taxes. The main focus appears to be on reductions in salary sacrifice schemes, higher property taxes and sin taxes that head up a long list of other taxes.

On the other side of the ledger will be higher benefit spending and some measures to reduce the cost of living, such as freezing rail fares and possibly a reduction in VAT on energy bills. The hope here is that bearing down on inflation will encourage the Bank of England (BoE) to cut interest rates further and faster to offset some of the pain of this year’s Autumn Budget.

What will the Budget mean for UK interest rates?

However, if the Budget does look something like the above, then those rate cuts seem unlikely.

If this year’s Autumn Budget is heavily backloaded, with the majority of the tax increases not coming until later in the decade, then the economic pain will be reduced next year, as would any downward pressure on inflation. The BoE is unlikely to cut interest rates now to offset a hit to the economy that might come in 2029.

There'll be some tax rises next year. But, in the broadest economic sense, these will mostly be offset by higher spending on benefits and lower taxes elsewhere, meaning the net impact on inflation could be relatively small. It’s also true that freezing rail fares and cutting VAT on energy bills would mechanically reduce inflation. This may have a marginal impact on future decisions to cut interest rates, especially if it feeds through into lower inflation expectations.

But, the BoE is likely simply to ignore any mechanical effects on inflation from lower taxes and focus instead on measures of underlying inflation. For example, a Budget like the above could cut 50bps (0.5%) from inflation next year. Yet, this would be temporary and in two years’ time inflation might only be 4bps (0.04%) lower than it otherwise would’ve been.

Admittedly, there is an asymmetry here. We’ve previously said that the BoE no longer has the luxury of ignoring things that temporarily push up inflation – as it would’ve done before the pandemic. We still think that’s true. But, that’s because inflation has been above target for most of the last five years and inflation expectations are too high and so doesn’t apply to things that temporarily reduce inflation.

That said, we also still think that the latest labour market, inflation and activity data has been weak enough to convince the MPC to cut in December unless we get another very stagflationary budget. However, ruling out an income tax rise and backloading the Autumn Budget means additional cuts will take longer to materialise, if they come at all.

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