Chancellor Rachel Reeves’ upcoming Budget is set to disappoint markets and leave Britain’s public finances on shaky ground, according to Deutsche Bank. Despite promises of fiscal discipline and a bigger safety buffer, top City analysts reckon the Budget will raise more questions than it answers. With thin fiscal headroom, manifesto pledges limiting revenue options, and spending cuts that “stretch credulity,” Reeves faces an uphill battle to convince anyone she’s got this under control.
Why Deutsche Bank Thinks the Budget Will Fall Short
Deutsche Bank’s Sanjay Raja doesn’t buy the hype around Reeves’ Budget delivering the fiscal stability markets are hoping for.
“Will the Budget provide a market-clearing that the market is hoping for? Simply, no,” Raja warned. The problem? Labour’s manifesto commitments are tying the Chancellor’s hands, leaving fiscal buffers “historically thin.”
Raja expects the headroom—that’s the surplus Reeves needs under her fiscal rule to balance the current public budget by 2030—to hit just over £16bn. Sounds decent until you realise that’s barely enough to absorb any economic shock, let alone the multiple curveballs the UK economy keeps throwing.
The Bank predicts around £30bn in tax rises, targeting housing, investment, and extending those frozen income tax thresholds we’re all sick of hearing about. But… even with these measures, fiscal consolidation won’t dampen growth enough to warrant immediate interest rate cuts. The real economic drag? That won’t show up until after 2028-29.
The Institute for Fiscal Studies Calls Out the Spending Plan
If Deutsche Bank’s scepticism wasn’t enough, the Institute for Fiscal Studies has piled on with its own concerns about Reeves’ spending strategy.
Bee Boileau, an IFS economist, pointed out that cutting spending during the three-year Spending Review period would be “challenging”— and that’s putting it mildly. Government departments have already made budget plans based on promises Reeves made back in June.
But the real head-scratcher? The Chancellor’s apparently planning to pencil in “sizeable cuts” for 2029-30, beyond the Spending Review period, when spending hasn’t even been allocated to departments yet.
“Simply pencilling in sizeable cuts to day-to-day spending in 2029-30 would stretch credulity,” Boileau said. Translation: nobody’s buying it.
The IFS acknowledges that spending cuts could reduce the need for tax rises, but warns that all options come with “unavoidable costs.” Basically, there’s no magic wand here, just tough choices nobody wants to make.
What Reeves Promised vs What She Can Actually Deliver
Reeves has been talking up her plans to build a fiscal buffer larger than £9.9bn to “absorb shocks” whilst focusing on curbing inflation and borrowing costs. Noble goals, sure. But the numbers aren’t adding up.
The speculation around ditching income tax rises has raised eyebrows among economists. Why? Because raising income tax is arguably the most straightforward way to generate serious revenue—even though Labour’s manifesto ruled it out.
With income tax, National Insurance, and VAT all protected by manifesto pledges, Reeves is left scraping together revenue from less obvious sources. Housing taxes? Check. Investment levies? Yep. Frozen tax thresholds dragging more people into higher brackets? You bet.
It’s fiscal consolidation by a thousand cuts rather than one clean slice.
Political Pressure Mounts as Budget Day Approaches
During Tuesday’s Cabinet meeting, Prime Minister Keir Starmer had some choice words about Budget leaks becoming a “distraction” from government delivery. He reminded colleagues that “rebuilding the economy” remains the top priority.
That piles even more pressure on Reeves to deliver something that actually moves the needle on living standards. With inflation still elevated, growth stubbornly low, and spending levels difficult to control, the Chancellor’s walking a tightrope, and City analysts reckon she’s wobbling.
The market wanted clarity and confidence. Instead, it’s getting thin buffers, questionable spending cuts, and a Budget that might create more problems than it solves.
What This Means for UK Economic Outlook
So where does this leave us? If Deutsche Bank and the IFS are right, we’re looking at a Budget that won’t satisfy markets, won’t dramatically improve public finances, and won’t provide the fiscal breathing room the UK desperately needs.
The consequences? Continued uncertainty around government borrowing costs, limited scope for interest rate cuts, and ongoing pressure on public services already stretched to breaking point.
For everyday Brits, it means the economic pain probably isn’t ending anytime soon. Higher taxes are coming—just not the straightforward kind that might actually raise sufficient revenue. And those spending cuts pencilled in for 2029-30? Good luck with that.
The bottom line: Reeves’ Budget might tick some political boxes, but it’s unlikely to be the fiscal turning point Britain needs. Markets are bracing for disappointment, and based on these forecasts, they’re probably right to.
FAQ
Q1: Will Rachel Reeves raise income tax in the Budget?
A: No, reports suggest the government has ditched plans to raise income tax rates, despite it being a more straightforward revenue-raising method. Labour’s manifesto pledged to protect income tax, National Insurance, and VAT from increases.
Q2: What is fiscal headroom and why does it matter?
A: Fiscal headroom is the surplus amount the Chancellor leaves against her fiscal rule to balance the current public budget by 2030. Deutsche Bank expects it to reach just over £16bn—historically thin and barely enough to absorb economic shocks.
Q3: Where will the £30bn in tax rises come from?
A: Deutsche Bank predicts the tax rises will target housing, investment, and extend frozen income tax thresholds. This approach avoids breaking manifesto pledges whilst still generating substantial revenue, though economists question whether it’s sufficient.
Q4: Why is the IFS sceptical about spending cuts?
A: The IFS warns that pencilling in major spending cuts for 2029-30—beyond the Spending Review period and before departmental allocations—lacks credibility. Government departments have already made plans based on earlier commitments, making cuts in the review period equally challenging.
Q5: Will the Budget lead to interest rate cuts?
A: Unlikely in the near term. Deutsche Bank suggests fiscal consolidation measures won’t dampen growth sufficiently to warrant immediate rate cuts, with the negative economic impact only emerging after 2028-29.
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Effective Date: 15th July 2025
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