A Budget of Stability, Not Transformation

A tight fiscal outlook, a calm gilt market and what it all means for the Welsh economy

A strange beginning

The Chancellor’s unconventional pre-Budget speech in early November was delivered at an unusually early hour. While many people were still eating their breakfast, Rachel Reeves pledged a Budget for growth with fairness at its heart, promised to make the difficult choices needed to strengthen the economy and respond to a world that continues to present new challenges. Yet instead of offering clarity, the speech sparked weeks of speculation, mixed signals and shifting expectations. That period of uncertainty ended sooner than expected when the Office for Budget Responsibility (OBR) released its forecast for the public finances in error shortly before the Chancellor delivered her Budget in the House of Commons.

The OBR now expects the economy to grow by 1.5% in 2025, a modest improvement on its spring projection. Growth is then expected to ease in 2026, which will continue to weigh on living standards and further limit the fiscal space available to the government. For businesses in Wales already managing higher costs, recruitment pressures and sluggish demand, the weaker outlook reinforces the need for sustained investment in skills, infrastructure and innovation, the core drivers of productivity and long-term growth.

Tax pressures and targeted support for Wales

The Chancellor confirmed that personal income tax thresholds will remain frozen until April 2031, a year longer than expected. This is the single largest revenue raising decision. Although tax rates remain unchanged, fiscal drag will pull many workers into higher tax bands. For households across Wales, this means take home pay will not stretch as far despite any wage growth (before adjustments for inflation). Other tax measures will also be felt. A cap on tax free pension salary sacrifice, together with higher taxes on dividend and savings income, will add further pressure once implemented.

For Wales, the most immediate fiscal news is the additional £505 million allocated to the Welsh Government between now and 2028. This funding comes alongside two new Artificial Intelligence (AI) zones and renewed commitments to the small modular nuclear reactor project on Anglesey. Although the overall funding is modest, the creation of the AI zones and the renewed focus on nuclear development will be welcomed by sectors involved in advanced manufacturing, energy and digital innovation.

Despite these measures, the broader picture remains tight. Public debt is forecast to rise to over 83 percent of GDP in 2028 to 2029 before falling slightly in the final year of the forecast. Based on its modelling and the range of possible outcomes, the OBR judges that there is only a slightly better than even chance that the government will meet its rule for debt to be falling by the end of the decade.

Fiscal headroom, the buffer between the Chancellor and her fiscal rule, has risen to £21.7 billion which is significantly above expectations. In the spring, Reeves left £9.9 billion in reserve, but the OBR said this had since been more than erased by a sharp cut in its forecasts for productivity growth, elevated borrowing costs and U-turns on welfare changes dropped earlier this year. While the current fiscal headroom has been increased, it still gives the government little scope for surprises and makes it difficult to respond to future economic shocks.

For businesses in Wales the stability of gilt markets is perhaps the most important immediate outcome. Yields initially fell when the OBR forecasts were leaked but later recovered. Markets took time to decide whether they liked the Budget or not, but the response now seems to be solidly positive. A calm bond market keeps borrowing costs steady, supports investment decisions and reduces pressure on the Bank of England. In this sense the Budget avoided the pitfalls that can quickly unsettle financial markets.

Wales’ long-term economic future

However, prioritising stability has required difficult choices. The tax burden is forecast to reach just over 38% of GDP by end of parliament, the highest level on record. The government has taken pains to emphasise that the wealthy will pay more, yet the combination of frozen thresholds and rising indirect taxes means most households in Wales and other parts of the UK will feel the squeeze. That places greater weight on the promise that today’s decisions will support long term economic growth.

For Wales, the challenge now is to turn the Budget’s modest allocations into meaningful improvements in productivity, skills and investment. Yet the foundations for economic growth depend on more than fiscal measures. The UK economy must remain open if it is to prosper, and geography matters. Europe is the UK’s natural economic partner, and in a world where the United States is becoming more protectionist and China continues to pursue a mercantilist model, a closer economic relationship with the EU has become even more important. Wales is not powerless in this space. It can strengthen its economic ties with Europe by making full use of the opportunities that exist within the current UK-EU Trade and Cooperation Agreement and by pursuing Welsh Government initiatives that deepen collaboration, expand trade support and build regional partnerships.

The choices made this week by the Chancellor will shape the environment in which Welsh businesses operate for years to come, and the real test will be whether they can help unlock the stronger and more open economy that Wales needs.