UK Week in Review - 31st October
More signs of resilience, but no Budget reprieve
Recent data continue to show that the UK economy - particularly the housing market - retains a decent degree of momentum. Yet this resilience will do little to spare households from what now looks set to be a round of significant tax rises in November’s Budget.
The Office for Budget Responsibility (OBR) delivered its final pre-measures forecast to the Chancellor today (31 October), meaning she now knows the scale of the fiscal tightening required to meet Labour’s fiscal rules. Given the deterioration in the public finances since March, we have long expected the Chancellor to bite the bullet, break the party’s election pledge, and raise income tax, an expectation gaining traction across the press this week.
A two-percentage-point rise in both the basic (currently 20%) and higher (40%) income-tax rates would generate just over £20bn per year. Combined with an extension of the income tax threshold freeze and a handful of smaller steps, such as restoring increases in long-frozen fuel duty or reducing the generosity of pension tax relief, this would go a long way towards offsetting fiscal slippage since March and rebuilding some resilience to the public finances. Crucially, it would also avoid the political and administrative complexity of assembling equivalent sums from numerous smaller measures (with the backlash over inheritance tax changes for farmers serving as a cautionary tale).
Housing Market: Momentum builds ahead of the Budget
Housing activity strengthened unexpectedly in September. Bank of England data showed mortgage approvals rising to 65,944, the highest level in nine months, more than reversing August’s dip. Net mortgage lending climbed to £5.5bn, up from £4.3bn in August and marking the strongest figure in nearly three and a half years (excluding the stamp-duty-driven spike in March 2025) (Figure 1).
Figure 1. Monthly mortgage approvals and net mortgage lending
Meanwhile, despite early-September’s gilt-market volatility, the average rate on new mortgages edged down to 4.19%, the lowest since January 2023.
Unsecured borrowing continued to expand faster than mortgage debt: consumer credit rose 7.3% y/y, while credit-card lending increased 10.8%, the fastest pace in 18 months. Whether this reflects improved consumer confidence or a growing reliance on debt to meet living costs remains unclear.
Nationwide’s October data also surprised to the upside, with house prices rising 0.3% m/m and 2.4% y/y. However, price growth still trails both inflation and wage gains. In real terms, the average home is now worth slightly less than a decade ago and roughly one-sixth less relative to average earnings (Figure 2).
Figure 2. House prices, consumer prices and average wages
Policy implications: Could fiscal pain trigger a housing adjustment?
The key question is whether a tough Budget could turn this real-terms weakness in house prices into an outright nominal correction. New or higher property-related taxes - for instance, additional council-tax bands for high-value homes or a proportional levy on more expensive properties - would likely temper demand and risk a modest price decline.
Politically, however, it seems improbable that the Chancellor would risk alienating property owners while simultaneously explaining why Labour has raised income tax, breaking a manifesto pledge in the process. A broad-based income-tax rise therefore remains the most plausible, and politically defensible, way to raise significant revenue and one which would avoid a direct hit to housing.
Paradoxically, tighter fiscal policy could even offer indirect support to the housing market if it encourages the Bank of England to cut rates sooner to offset the drag on growth. That would translate into lower mortgage rates and more stable demand. Market pricing this week has moved further towards expecting another rate cut before year-end, a view we have held for some time. While a move next week looks unlikely (the BoE will likely wait for the Budget first), we think a December rate cut is highly probable.
Our Take
The latest figures confirm that the UK economy remains more resilient than many anticipated. But that very resilience gives the Chancellor more political cover to tighten fiscal policy.
We think an increase in income-tax rates is the cleanest and most credible route to restoring fiscal headroom, albeit one that is far from cost free and will weigh on incentives to work, save, and invest.
The near-term risk to housing is limited. The market appears robust enough to absorb higher taxes and slower growth, especially if monetary easing follows. But with house prices falling relative to prices and earnings, the sector’s medium-term recovery will depend on how deftly the Treasury and Bank of England manage the looming fiscal-monetary trade-off.
Week Ahead
Next week’s final October PMIs for manufacturing (Monday 3 Nov) and services (Wednesday 5 Nov) should confirm the tentative rebound signalled by the flash readings. Both sectors appear to be regaining momentum, hinting that the UK economy may be picking up steam heading into winter.
The Bank of England’s meeting on Thursday 6 Nov presents a finely balanced call. September’s softer-than-expected inflation, slower wage growth, and more signs of cooling labour demand have all chipped away at the case for holding rates high for longer. We think the dovish minority on the Monetary Policy Committee - Swati Dhingra and Alan Taylor, who both voted for a cut in September - will be joined by a third, likely Dave Ramsden, who has dissented before and recently voiced concern over labour-market softness.
Even so, a majority are likely to hold fire, preferring to see if recent disinflationary signals prove durable and how the Budget shapes the inflation outlook.
A rate cut may therefore have to wait until December. In the meantime, the tone of the minutes, rather than the decision itself, will be key - any shift towards acknowledging downside risks would be the clearest signal yet that more monetary easing is imminent.
