UK Week in Review - 14 November 2025
Key takeaways
Budget leaks unsettle markets as income tax rises appear to have been dropped.
Mooted threshold freezes would shift more earners into higher bands, increasing distortions.
Labour market weakens with falling payrolls and rising unemployment.
GDP near-stagnates as investment lags and consumer spending barely grows.
Tax uncertainty risks offsetting tailwinds offered by strong private sector balance sheets and low debt burdens.
More Budget turbulence and a softer economy
It seems like a different world when Budget secrecy was considered sacrosanct - so much so that Chancellor Hugh Dalton resigned in 1947 after tipping off a journalist about policy decisions just 20 minutes before his speech. Today, by contrast, the leaking and kite-flying ahead of the 26 November Budget has reached fever pitch.
Reports this week that the Chancellor has abandoned widely expected income tax rises triggered an immediate market reaction, with gilt yields rising and the pound and equity prices slipping. The timing was hardly favourable, coming alongside soft GDP and labour market releases that dampened earlier hopes the economy was turning a corner.
According to the Financial Times, the Chancellor has now dropped plans to raise the basic and higher rates of income tax. Instead, she may cut income tax thresholds and rely on a “smorgasbord” of smaller tax rises elsewhere. This would avoid breaching Labour’s manifesto pledge not to raise income tax. More reassuringly, forgoing income tax hikes may also reflect the OBR’s reported assessment that the fiscal hole is a bit smaller than feared, helped by a boost to forecast income tax and NICs receipts from stronger-than-expected pay growth.
Cutting allowances may avoid headline tax rises, but it risks pulling many more people into higher bands and creating steep jumps in effective marginal tax rates as they cross thresholds - a more distortionary outcome than simply raising marginal income tax rates. And the arithmetic is still unforgiving. Raising £8bn (the equivalent of a 1p increase in the basic rate of income tax) would require cutting the personal allowance by around £800, costing everyone earning under £100,000 £160 a year.
If the Chancellor leaves the allowance untouched, achieving the same revenue would mean lowering the basic-rate limit from £50,270 to roughly £46,000 and the additional-rate threshold from £125,140 to around £100,000. Meanwhile, pursuing a patchwork of smaller tax rises would add further complexity and heighten revenue uncertainty, while reinforcing questions about the government’s willingness to take difficult fiscal decisions after U-turns on winter fuel payments and disability benefit reform.
Given the political turbulence within Labour this week, including talk of leadership manoeuvring, it is hard to avoid the conclusion that shelving income-tax rises (if that is indeed what has happened) is driven at least partly by internal party management and a desire to protect the Prime Minister’s position, rather than purely by economic logic.
Labour market loses momentum
The week’s Budget noise arrived just as the labour market showed renewed signs of cooling. Payroll employment fell by almost 32,000 in October, matching a similar drop in September and marking the sharpest two-month fall since late 2020 (Figure 1). And the LFS unemployment rate rose to 5% in Q3 - its highest in more than four years.
Figure 1. Payroll employment
There were glimmers of resilience: the long decline in vacancies appears to be bottoming out, with openings rising slightly in the three months to October, the first such increase since June 2022. But the improvement is fragile. Vacancies remain 13% below pre-pandemic levels, and the unemployed-to-vacancies ratio is the highest in over four years.
Cooling pay pressures may help limit further deterioration. Private-sector regular pay growth slowed to 4.2% in the three months to September, the weakest pace since early 2021. But with unemployment rising and political uncertainty building, households may well rein in spending.
GDP stalls
The GDP numbers reinforced the message of a more fragile economy. Output shrank by 0.1% in September, leaving Q3 growth at just 0.1%, down from 0.3% in Q2 and below both Bank of England and consensus expectations.
Granted, September’s shutdown of Jaguar Land Rover production in response to a cyber-attack exaggerated the economy’s weakness. But the composition of growth didn’t offer much encouragement. Consumer spending rose just 0.2%, leaving household expenditure barely 1% above its pre-pandemic level. Business investment fell for the second consecutive quarter, underscoring how far the UK lags behind the AI-driven investment boom in the US. Exports slipped slightly, but falling imports meant net trade contributed modestly to growth (Figure 2).
Figure 2. GDP and expenditure components
On this trajectory, our above-consensus forecast of 1.5% growth in 2025 looks increasingly difficult to deliver. However, we remain comparatively optimistic about 2026. A tighter fiscal stance after the Budget would weigh on demand in the short term but give the Bank of England more room for decisive rate cuts through 2026. Combined with falling inflation, this could support a recovery in household and corporate activity.
Confidence is the missing ingredient
In aggregate, households and firms are not financially constrained, in fact far from it. Debt burdens are at multi-decade lows, savings are still elevated, and balance sheets are strong. The capacity to borrow and invest is there. What is missing is confidence.
That places real importance on the Chancellor using the Budget not just to stabilise the public finances, but to articulate a credible pro-growth strategy: tackling regulatory bottlenecks, reducing high energy costs, and clarifying long-term investment priorities. Without such signals, the risk is another year of underperformance regardless of improving fundamentals.
Week Ahead
Inflation – Wednesday 19 November
October’s inflation data should signal the start of a sustained slowdown in consumer price rises. The CPI measure held steady at 3.8% in September, coming in below Bank of England and consensus expectations. All else equal, favourable base effects will have supported a moderation in price growth in October: consumer prices rose sharply in October 2024, driven by a significant increase in energy bills, whereas the Ofgem price cap rose much more modestly this October. Offsetting this, petrol prices increased slightly between September and October this year, compared with a fall over the same period in 2024. On balance, we expect CPI inflation to ease to 3.6% in October.
Retail Sales – Friday 21 November
ONS data will reveal whether retail sales volumes managed a fifth consecutive monthly rise in October—a feat not achieved since 2010 (excluding Covid-distorted 2020). It looks unlikely. Persistent wet weather appears to have kept shoppers at home, while growing anxiety around the Budget may also have restrained spending. We expect sales volumes to have fallen by 0.3%.
