Briefing: Chancellor’s handling of upcoming Budget 'actively making' it harder to deliver

Chancellor Rachel Reeves will, on Wednesday (26 November 2025) deliver her second Budget against a context of political chaos and worsening economics.

The Budget was already being held in poor circumstances, but the manner of its arrival is increasing the chance it may unravel afterwards.

The central story is the black hole in the Budget numbers. The latest Treasury briefing is that the chancellor needs to find around £20bn across the forecast period just to make the sums add up.

On top of this, she clearly also needs to build a much larger fiscal buffer than the sub-£10bn she allowed last time, meaning her overall target is probably to raise more than £30bn.  

This is a very large problem, significantly driven by the Office for Budget Responsibility’s (OBR) revision of its productivity numbers. It is, however, exacerbated by a lack of confidence in the stability of UK fiscal policy, resulting in the government having the highest debt costs in the G7, despite having lower levels of public sector net debt than Japan, Italy and the US.

Additionally, economic performance since the last Budget has been woeful – significantly worse than OBR predictions at the time.

Firm footing?

After last year’s Budget, Rachel Reeves told the CBI that she had now “put our public finances back on a firm footing” and that she would not require “more borrowing or more taxes”. This was the most prominent of a series of hostages to fortune.

Reeves is a fan of chess. At the time, it looked very likely she had put herself in a zugzwang – a position where she was disadvantaged by having to make a move .

And so it has proved.

The chancellor faces a choice between fixing the hole by pulling one very large lever, or through a ‘smorgasbord’ of smaller measures.

The first option is raising one of VAT, employee national insurance contributions (NIC) or income tax (IT) – and the Treasury was clearly looking at IT, in particular.

Option two is more messy and all kinds of things could feature here. Possible measures include restricting salary sacrifice, increasing company car tax, extending the freeze on income tax bands, cutting VAT reliefs and increasing IPT.     

Either route comes with significant downsides. Option one is economically cleaner and more decisive, but unambiguously breaks a principal manifesto commitment – something clearly viewed as toxic in Labour circles.

Option two will create significant losses among certain key groups – undoubtedly resulting in very focused and ongoing political pain likely more economically damaging. For example, the areas listed above variously hit car production, pension savings, take up of insurance and, in a lot of cases, drive up inflation.

It is therefore harder to make stick, something undoubtedly not lost on the government’s creditors.

Option two – the ‘smorgasbord’ – is clearly now the favoured approach, but the chancellor’s handling has made it even harder to deliver.

After delivering an early morning speech publicly to roll the pitch for a manifesto-breaking increase in income tax, Reeves then abruptly changed course. When this was leaked, gilt yields surged. It is hard not to conclude that this reversal is motivated more by fear of the response of her colleagues than fear of the markets. Again, there is no doubt the gilt markets will have noticed. 

The clumsy politics are actively making the chancellor’s job harder – destroying the Budget arithmetic and increasing the chance of it unravelling. If that comes to pass, she, or more likely her successor, will have to return next year to pull lever one after all.