Brad Rogoff:
Welcome to the Flip Side. I'm Brad Rogoff, Global Head of Research. Usually, we get right into it, but this is the last episode of the year, as our monthly cadence won't have us record again until early 2026. So I wanted to say thank you to all of our listeners this year. And for those of you just joining, don't forget to subscribe so you can hear from us regularly in 2026. This week on the podcast, I have Jack Meaning joining us, our UK Chief Economist.

Jack Meaning:
Hi Brad. Great to join you.

Brad Rogoff:
Alright. Thanks, Jack. I'm done being sentimental. We can actually get into the debate now. And what I wanted to debate was the UK Autumn Budget. Was this a success or was it a shortfall?

So let's recap for a quick second. On the 26th of November, the UK Chancellor delivered her second annual budget under intense scrutiny from markets, voters and MP. So what happened? Taxes were up, a buffer was built. She raised taxes, boosted headroom beyond market expectations, importantly, I think here. It creates a cushion against shocks and reduces the need for more hikes, if growth stalls. So taxes increased by £21.6 billion by 2029-'30. It's now forecast to hit over 38% of GDP. Headroom against the borrowing rule to have the current budget in balance, once again by '29-'30, was £21.7 billion, and it's more than double the headroom in March 2025, when really there was a lot of scrutiny.

So the key metrics were delivered. Markets wanted that headroom. They wanted to break the doom loop of speculation. And I think she hit that main goal. And markets have been expecting probably £15 billion to £20 billion. And we got just over that. And then importantly, there should be minimal growth impact. I mean I go with your analysis, Jack, which shows she achieved everything without really denting growth at all, as you didn't have a downward revision of your GDP forecast over the next couple of years.

Jack Meaning:
No. I mean, you've got me from the off there, Brad. We actually made some very marginal upward revisions to our GDP forecast for 2026. So they didn't show it the first decimal place. But I mean, I guess really the kind of the challenge to the picture you've just painted is how the Chancellor created that headroom, because I can't disagree. I think the market took the extra headroom as a positive. But really when you get into the detail, you see that the way the Chancellor achieved that was through back-loaded taxation. So it's true to say that spending is up in every year of this Parliament relative to the Chancellor's previous plans. So there was no additional spending restraint involved in this budget. But what we actually saw were increases in taxation on pension contributions and a freezing of income tax thresholds, which drags more people into higher tax brackets, doesn't kick in until 2028 or beyond.

So of that £21.7 billion of headroom, you mentioned, Brad, £18 billion of it comes in the final year of the fiscal rule '29-'30. And the problem of that is really that that is going into an election year. So we think that - implicitly that's a 0.7% of GDP consolidation going into an election that would really weigh on growth. And do you think that's really the type of thing that governments were inclined to do as they see the electorate go to the polls?

Brad Rogoff:

Well, probably not, but also 2028 is a long way off. This is the UK. We don't know exactly when elections will wind up being. But I want to talk about what matters for now. And as listeners to this podcast know, I tend to look at the markets for scoring things. And the reaction was clearly positive. You had 10-year gilt yields, which fell up to 8 basis points on the day. And as we're recording this, they're still lower than they were before the budget was released and some of the lowest levels of the last year.

Equities performed well. The FTSE 250 is up around 1% since the budget and close to a four-year high. But sterling, you got some slight gains against the dollar and the euro. So to me, the bottom line is all of this budget speculation that we had going into it and the risks of a misstep, I don't know, I think it looks like a success.

Jack Meaning:
Yeah. I mean, again, Brad, I think the heart of what you're saying is true. At the time the budget was announced, which actually came out a little bit sooner than was intended, given there was an accidental pre-release about an hour in advance.

Brad Rogoff:
That was entertaining by the way.

Jack Meaning:
Yeah. I just stepped out for a sandwich at that point and then realized I had to be back at my desk very quickly to pick it up. But yeah, that aside, the market reaction on the immediate acknowledgment was, as you say, pretty good. I think the risk is that we see what we saw after last October's budget, which was a slow realization. Actually, maybe the details of this are less positive than that head room number would point to. So I think this idea of this back-loaded fiscal consolidation, I think it took time for the market to internalize that.

And I think what we're seeing now, particularly when we talk to our clients is that there's now a focus that's moved from economic risk to the Chancellor delivering a budget that ticks all the boxes to political risks about whether she'll still be in place to deliver it. We have seen actually the Head of the Independent Office for Budget Responsibility, Richard Hughes, have to stand down because of - ostensibly because of that leak and kind of pre-release of the report. But once you've got people stepping down from their positions in the fiscal process, really the market's focused on whether Rachel Reeves is next.

Brad Rogoff:
And look, I hear you that it was a little bit quieter time. There was a lull and there's more focus. I was much more focused that day on brining my turkey than worrying about this. Although, I did notice, as I said, that sneaky little pre-release. But let's talk politics since you brought it up, and I know there's a risk always in talking politics, and I look at things. Labor dissent has certainly eased on the back of this. Criticism was louder before the announcement.
And I think if you look at the strategy and kind of delay the pain, shift on key policies, something like the child benefit, that helps soften opposition. So really what happened here is you bought time with backbenchers and that stabilized party support I think.

Jack Meaning:
Yeah. I mean, look, it's - politics is a much harder game to read than the economics, so I tend to try and stay in my comfort zone. But if you look at where the polls are in the UK, they're not looking good for the Labor Party. They've seen a real drop off and the challenges are all up. And while you're right that actually in the very near-term, it seems like the kind of political pressure is lessened a little bit on the Chancellor, we still have local elections, which are big crunch point in May next year, and it's widely expected that actually the Labor Party will do very badly at those local elections, at which point the speculation in these doubts over, not just the Chancellor but the Prime Minister, may come back to the fore.

In the meantime, just the fact that that speculation is continuing will keep uncertainty high. And we've already seen in the UK data in the second half of this year that actually that uncertainty, that speculation weighs on consumers' decisions. It weighs on businesses decisions to invest. And so it's not beneficial to see that continuing as we move into '26.

Brad Rogoff:
Alright. We had to address politics. But I think it sounds like both of us are ready to get back to economics, to your point. So let's talk about inflation. Because inflation risk was definitely a key concern, and I think the Chancellor avoided the worst of it there. It really was, for the most part, a non-inflationary outcome. Looking at your estimates, you'd been warning actually on inflation measures and how that could potentially hurt growth. And she delivered a pretty benign path.
If we look at some of the policies they really lead to a cut in inflation. And that's the fuel duty freeze from April, the removal of energy, levies, the railroad freeze for 2026. And together, all of that could trim about 0.5 percentage point from headline inflation starting in April of next year.

And then on the cost of living side, you have relief there at a time where households really have been strained. I think that's a big win. And so it all aligns with your view that a non-inflationary budget was critical here.

Jack Meaning:
Yeah. I mean - yeah, I think we had flagged, as you say, in advance, that probably the worst of all worlds was an inflationary budget. And I think, as you've just described, the Chancellor delivered something that was outright disinflationary in the very near-term. But I guess, while that's a real welcome development for any households that are currently struggling in the UK with the cost of living, of which there are many, the more medium outlook is a little bit mixed. So we've brought down our near-term view on headline inflation. But really the budget didn't do anything to touch core inflation. It's all about these energy levies that have been moved out of household bills. It's about fuel duty freezes. And so those things don't affect core inflation in the same way. And they are relatively short-lived. They will feed through the inflation numbers probably mechanically for the next year or two, but they won't affect the medium-term view of kind of the balance of supply and demand and inflationary pressures in the economy.

And I think that's why we think this probably doesn't shift the dial for the Bank of England's two to three year forecast. And actually, if you look at what Bank of England Monetary Policy Committee members have already said since the budget, then they're describing this as a one-off price level shock that really policymakers should be looking through. So it probably doesn't lead on that basis to more rate cuts.

Brad Rogoff:
Well, maybe it doesn't lead to more rate cuts, but you've had committee members kind of warn that near-term inflation, whatever the cause, could make inflation stickier and justify higher rates for an extended period of time. Right?

So I think with the budget, it should ease a bit of that risk. And maybe the cuts don't come right away, but you have a little bit more dovishness hopefully I think that would seep into the committee. Do you feel like I'm off on that?

Jack Meaning:
I mean, Brad, I absolutely agree with you in terms of the rationale and the economic kind of argument there. I think if you are arguing that price level shocks on the upside, risk to inflation persist and the negative price level shock should reduce that risk. That makes perfect sense to me. I mean, for what it's worth, we didn't think that those risks to upside persistence were that material in the first place. So it doesn't make much of a shift to the downside.

But I think it's consistent to say it's there. Where I disagree is I just don't think that is how the committee at the Bank of England are interpreting, at least those that we've already we've heard from. I think we've heard them discussing the focus on core inflation. As I said, it's not really that affected, and the medium term kind of headline inflation, which they don't have headline inflation prior to the budget reaching 2% until the first half of 2027.

And so, even with this near-term downward revision, that doesn't really change the medium term, fact that they have a view that inflation will be above target for a while. Now, what does that mean? I think it probably means that while we still expect a December cut, and we think there'll be another one in Q1 of next year, so rates will get to 3.5%. The options for much more than that without a more material deterioration in the economy, I think is a bit of a stretch. And so we think that actually, we have terminal this cycle around 3.5%.

Brad Rogoff:
Let's get into some of the specifics. We've talked politics. We've talked macro. Let's talk micro now. So if I think about the two child benefit cap, removing this. The headline numbers are pretty impressive, lifting potentially 450,000 children out of poverty. I get that it came at a cost of £3 billion, but it does give families affected an average of £5,000 more per year, which is meaningful. And then there's also the pay per mile tax on EVs, which feels like a necessary step as we transition away from petrol and diesel and into more of a common EV world, if you will. So these are policies that, to me, can make a tangible difference, I think.

Jack Meaning:
Yeah. And Brad, where I would agree with you is that actually, these kind of sensible economic policies in the sense that we know that transition to EVs is happening. And it's very hard to say bringing children out of poverty is not a positive outcome and doesn't have spillover effects to the rest of the economy.
But I guess my real concern with the kind of specific budget policies as they stood was it's hard to see any specific policy that was really a driver of growth or productivity. So the OBR revised down their forecast for growth. They're now more in line with us. We think they're probably a bit optimistic in advance of the budget. And now they're broadly where we are.

But for the Chancellor to not have to deliver that fiscal tightening in '29-'30, then really she's going to have to, as she phrases it, beat the forecast. She's going to need growth to pick up more than we are all expecting. And is freezing the tax threshold, which brings more low earners into paying higher tax. Is that going to stimulate growth? We'll charge you more tax on people's pension contributions and passing on more cost to businesses that way. Will that push up growth? Probably not.

And then these hard choices still loom. So given that speculation, will the uncertainty itself help people to be confident in making the investments and spending decisions that will boost growth? Again, it's hard to see that this has been positive for growth, which is really what the Chancellor needs.

Brad Rogoff:
All right, Jack. So we got through some politics. We got through the macro. We got through the micro. And I think, look, the Chancellor's primary goal here was clear. Calm the markets, build fiscal headroom, and avoid adding to the cost of living. By those measures, I think the budget has delivered.

Now, I understand your point about the back-loaded nature of the fiscal consolidation, and that means there's going to be speculation about the sustainability of UK fiscal policy. That's not going away anytime soon.

So I'd like to just extend the invitation right now for 2028. We're definitely going to have you back on then to see how this all plays out. If not, maybe before, because we know UK elections can come a little bit more often than necessarily how they're planned out. So with that, clients of the Investment Bank can explore the UK Autumn Budget in depth with our latest report, including Autumn Budget: Consolidate, but not yet. Our weekly series, the signal from the noise is also focused on all things UK macro, if you like to hear about it in podcast edition.

And don't forget once again to subscribe so you never miss an episode of The Flip Side.