Autumn budget 2025: What did we learn from Rachel Reeves’ announcements?

There were big tax rises. Tax in the UK is set to rise to an all-time high as a share of GDP. But rather than being needed to address a weaker forecast – borrowing was just £6bn higher than previously expected in 2029/30 – they were to build greater headroom against Reeves’ fiscal rules, to cover the cost of welfare U-turns in the summer and to fund priorities such as abolishing the two-child limit. In this comment, IfG experts review the key things we learnt from the 2025 budget.

Ensuring greater headroom is sensible, though uncertainty over future revenue could throw Reeves off course

The welcome news from the budget was that Rachel Reeves has increased her headroom against her fiscal rules. At last year’s budget and in the spring statement, she was on course to meet her target for day-to-day spending to be at least matched by revenues by just £9.9bn. This left her very much at the mercy of events outside her control: even relatively small changes to the economic outlook could – and did – throw her plans off course. 

She has now increased that headroom to £22bn. That is still not a huge margin for error, given the average revision to an OBR forecast every six months is £21bn , but is probably enough to reduce the likelihood that she is blown off course again.

The new policy measures repeated a similar pattern to that seen in Reeves’ first year in office: substantial tax rises (partly used to increase headroom) alongside spending increases on priority areas. One big difference was that, this time around, the spending increases were focussed on welfare, rather than making cuts in that area as happened in the last two fiscal events.

While the increased headroom against the fiscal rules is welcome, Reeves also made some choices that arguably undermine fiscal sustainability. First, like many of her predecessors, she chose to allow borrowing to rise in the near term, with all the ‘fiscal consolidation’ backloaded at the end of this parliament. That raises the risk that she will not be able or willing (so close to the next election) to follow through. For example, and again like many of her predecessors, she has pencilled in implausibly tight spending plans for the years beyond the current spending review period: will she really be able to deliver those when she has to flesh out the details?

Second, most of the giveaways (such as reversing cuts to winter fuel payments and disability benefits, and abolishing the two-child limit on benefits) are certain, while many of the planned tax rises are highly uncertain (putting in place entirely new taxes on high value properties and electric vehicles, for example, will be far from straightforward).

There was little evidence of a longer-term tax strategy

The chancellor can claim credit for starting to tackle some issues that countless of her predecessors had ducked. Particular credit is due for recognising the need to start levying a tax on electric vehicles to ensure motoring continues to be taxed as fuel duty revenues fall away. Similarly, beginning to address the relative under-taxation of high-value homes, which are the massive beneficiaries of repeated failures to revalue council tax bands in general, is sensible. She also started to redress the balance of taxation between “earned” and “unearned” income with a new 2% levy.

But none of this was couched in a clear vision for the future evolution of the tax system, rather they just emerged as politically convenient targets. And the chancellor did duck more serious reforms of tax in these areas – such as by targeting more directly the congestion costs of EVs, properly revaluing properties for council tax (last done in 1991), or introducing any kind of indexation allowance for investment income or cost deductions for rental income.

In other areas there was also no sense of where Reeves wanted the tax system to be heading longer term. In particular, does she have a view on the long-term shape of the income tax system? Does she have a clear view on the taxation of pensions (where salary sacrifice is now capped) or savings (with a change to how ISA limits work for under 65s)?

Despite some welcome steps towards reform, the answers to these are little clearer than before Reeves left the dispatch box on Wednesday. 

New OBR forecasts were better than expected, but are no guarantee of success

As was widely expected, the OBR downgraded its forecast for productivity growth (from 1.3% a year to 1% a year). The new forecast is closer to the levels seen in the UK since 2008, though would still imply an improvement on the last couple of years. However, this change means that the economy is now expected to grow more slowly which, by itself, would have left the government £16bn worse off in 2029/30.

But that was not the whole story. As we highlighted in our preview comment, wages are growing more strongly and inflation looks set to remain higher than the OBR previously expected. Both help the chancellor as they lead to higher receipts from income tax, national insurance and VAT (though they also mean the government needs to spend more on welfare and debt interest). 

Taking all this together, before any policy measures, the OBR’s forecast for borrowing in 2029/30 was £6bn higher than it thought in March. That would have left the government with £4bn of headroom against its fiscal rules (down from £10bn). 

Adding in £7bn needed to fund U-turns on disability benefit and winter fuel payment cuts, the government needed to find £11bn to keep the same level of headroom against its fiscal rules as in the spring. In the end, the government decided to increase that fiscal headroom to £22bn. 

The OBR’s forecast was better than expected, but the chancellor and her team will be aware that no forecast is ever water-tight. One example is net migration. Only today, the ONS released net migration figures ⁶ https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/internationalmigration/bulletins/longterminternationalmigrationprovisional…  notably lower than the OBR’s expectations; if the former are correct this would mean a smaller working population, lower tax receipts and lower growth. The chancellor may soon need the headroom she painstakingly built at this budget.

Autumn budget 2025: What is Rachel Reeves’ plan for the economy?

Watch our IfG expert webinar on the chancellor’s budget.

Continuing tax threshold freezes will hit living standards

Improving living standards by tackling the cost of living was a key focus for the chancellor at this budget. So the OBR’s expectation that real household disposable incomes (RHDI) will grow more slowly on average than it had previously expected will have been a blow. 

The main driver of this is the freeze to personal tax thresholds that will increase the amount of tax that households pay, as more people are ‘dragged’ into higher tax bands and many start paying tax on their earnings for the first time. If this forecast is realised, the Resolution Foundation estimates that this would be the second worst parliament on record for income growth ⁸ https://www.resolutionfoundation.org/publications/stairway-to-headroom/ , ‘beaten’” only by the 2019-24 parliament, which was disrupted by the pandemic.

However, RHDI is an average measure and not the only way of judging the package of measures which the chancellor has introduced to target living standards. The abolition of the two-child limit, for example, will make a big difference to some 560,000 families who will receive higher Universal Credit payments averaging an extra £5,310 per year in 2029/30. The government estimates that this will lift 450,000 children out of poverty and cost £3bn a year.

Elsewhere, the package of budget measures on regulated prices will also help households with the cost of living. This includes extending the fuel duty freeze until August 2026 and energy bill reductions (household energy bills will fall by £130 for a typical household). But the impact of this is frontloaded in the next couple of years. After that, the funding for some of the energy bill cuts expires and the chancellor has said that fuel duty will begin to rise. 

There are bright spots for public services, but unrealistic future spending plans undermine the budget

Cuts to public spending was floated as one tool the chancellor could use to balance a tricky fiscal situation. Before the budget, the government planned to grow spending by 1% in real terms between 2028/29 and 2029/30. That is no longer the case. Instead, there will be no real terms growth in spending between those years. If the government had wanted to maintain that 1% real terms increase, it would have needed to spend roughly £6bn more in 2029/30 (in 2025/26 prices).

Paring back spending in 2029/30 means the government will meet its fiscal rule that day-to-day spending is financed by revenues in that year, while also being able to fund other commitments like the end of the two-child limit for benefits and an increase in headroom. 

But, put bluntly, those 2029/30 numbers are a fabrication. As the OBR points out, they imply steep spending cuts of 5.8% in real terms to ‘unprotected’ departments between 2028/29 and 2029/30. Unprotected services include prisons, courts, probation, and adult and children’s social care. Given the difficulties facing all those services, it is unrealistic to think that the government will be able to cut their spending by that much in the year of an election.

Elsewhere, the Office of Value for Money (OVfM) published a document outlining positive changes to the accountability and spending framework. These include raising departmental delegated authority limits (DALs), the amount of money that a department can spend without seeking approval from the Treasury and something that we called for in this year’s Public Services Performance Tracker. It also advocates shifting spending decisions closer to the frontline of services and reducing the number of approvals for spending proposals. 

Combined with other announcements such as the piloting of place-based budgeting, it appears the government has realised that gripping public services’ spending too tightly results in poor value for money. A shift towards more local control should be welcomed but must be radically scaled up at the 2027 spending review.