The UK’s 2025 budget, delivered by Chancellor of the Exchequer Rachel Reeves in November, cleared what seemed to be its first major hurdle: the market’s reaction.
Yields on 10-year UK government bonds fell by 10 basis points, while the sterling appreciated. For the chancellor of the exchequer, this small market reassurance is a signal that investors believe the government remains fiscally responsible and capable of servicing its debt without spooking bondholders.
But while debt technicalities and borrowing costs may for now be under control, the deeper question remains unanswered: is this a budget that sets the stage for long-term growth, productivity and economic renewal, or merely one that stabilises the public finances at the expense of investment in the country’s future?
The government has avoided reckless borrowing and maintained a credible path to balance. Long-term investors likely see fewer tail risks: an orderly fiscal trajectory, no rash tax increases or major borrowing sprees – hence a lower chance of a debt-spiral or crisis.
This caution, however, is the very reason this budget feels timid. Markets care about stability, but should also care about growth, fairness and opportunity. By delivering stability without ambition, the government risks leaving the UK stuck in a low-growth, low-productivity equilibrium. If the objective is to deliver a growth-led future, as the chancellor often says, there is still a long way to go.
Heavy on revenue but light on investment
The UK Treasury now expects roughly £22bn of fiscal headroom over the forecast horizon. However, at its core, the November budget is resolutely a tax-and-spend budget, not an investment-and-reform budget. The headline figure – £26bn in new tax revenues by 2029/30 – comes from measures such as freezing income-tax thresholds and increasing taxes on dividends, savings, property and other revenue-rich bases.
Despite the expanded fiscal headroom, there was no corresponding commitment to large-scale public investment, structural reforms or capital expenditure to boost productivity. Without no sweeping infrastructure plan or any transformative investment in skills, digitalisation or industrial capacity, the government chose, at least for now, to double down on tax and welfare policy. In doing so, it missed a crucial opportunity: channelling new revenues into productive investments that generate long-term impact, jobs and sustainable economic growth.
Among the few notable spending-side measures was the scrapping of the two-child benefit cap. As the budget papers make clear, the cap will be abolished, with a projected annual cost of around £3bn. The cap’s removal is likely to lift hundreds of thousands of children out of absolute poverty. The government estimates the measure will mean 450,000 fewer children are in poverty by 2029/30. For some households, the extra support may improve living standards, reduce hardship and offer breathing room in a cost-of-living landscape still under pressure.
However, this measure adds materially to long-term welfare costs, without an obvious source of productivity gains or economic returns. In a context of sluggish growth and stagnant productivity, this raises legitimate concerns about sustainability. Furthermore, expanding welfare without coupling it to reforms in childcare, employment support, training or incentives could entrench dependency rather than foster social mobility. There is a risk that the spending becomes a recurring burden, rather than a catalyst for empowerment or economic dynamism.
With fiscal headroom derived largely from tax rises and threshold freezes, the government is effectively transferring the burden onto working households, savers and investors, without delivering a parallel plan to build the economy’s capacity, resilience or growth potential. The welfare expansion may help soften social hardship in the short term, but it is not a substitute for future capital investment.
Danger of treating fiscal stability as an end in itself
There is an essential critique at play: treating fiscal stability as the final objective invites a narrow interpretation of success. Under that paradigm, success equals fiscal headroom and balanced budgets. But that approach risks overlooking why we borrow or tax in the first place: to invest in things that raise living standards, productivity and the nation’s human capital.
By using the extra room for welfare expansion and tax drag, rather than committing to capital spending or structural investment, the government leans into short-term political convenience rather than long-term economic transformation. That might soothe markets now, but it also risks stagnation, as public infrastructure decays, productivity lags and the UK falls further behind in global competition.
If what we really want is growth, productivity and opportunity, then tax increases and welfare expansions are only part of the picture. The truly transformative path is to invest in productive assets that generate returns over decades: infrastructure, green technologies, skills and training, research and development, digitalisation, sustainable housing, transport and social capital. By simply reinforcing welfare and revenue measures, the November budget stops short of setting the UK on that path.
For the next budget, the government should shift from raising and spending to investing and reforming. If it fails to do so, the fiscal buffer may end up as little more than a comfort blanket: useful in a financial storm, but not enough to build resilience, prosperity or shared growth for citizens over the long haul.
Andrea Correa is Senior Economist at OMFIF.
Image Source: HM Treasury
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