Introduction
With the US mid-term elections approaching and unrest spreading across parts of Europe, the UK looked like a relatively peaceful place for John Healey to deliver his first Budget.
However, the commitment to Rachel Reeves’ fiscal rules and the need to maintain the confidence of global bond markets have limited the Chancellor’s room for manoeuvre. The more ambitious ideas Andy Burnham has floated remain some way from becoming meaningful policy.
UK
The Chancellor delivered his first Autumn Statement against a backdrop of war in Ukraine, conflict in the Middle East, inflation and volatile energy prices.
At the IMF/World Bank meetings in mid-October, Healey committed to maintaining Rachel Reeves’ fiscal rules. The Budget contained a large number of smaller changes, while decisions on spending cuts, particularly to welfare, were pushed into the new year.
The Government’s stability rule requires it to balance the current budget – day-to-day spending against revenue – by 2029/30. This has rarely been achieved over the past 25 years.
The latest OBR projection puts the Chancellor’s headroom at £15bn by 2029/30. That should be enough to avoid immediate concern, but it leaves little room for unexpected costs or changes in the economic outlook. The Chancellor expects headroom to rise to £22bn in 2030/31.
The OBR’s growth forecasts were mixed. It expects gross domestic product (GDP) to expand by 1.2% this year, an improvement on its March outlook. However, next year’s forecast has been reduced to just 1%, down from the previous estimate of 1.6%.
The outlook improves from 2028 onwards, with growth forecasts for the remaining years upgraded. The average annual GDP growth rate between 2026 and 2030 remains unchanged at 1.5%.
The OBR also increased its inflation forecasts to 3.1% this year and 3.4% in 2027. In March, inflation had been expected to reach 2.3% in 2026 before falling to the Bank of England’s 2% target.
These forecasts point to a difficult 12 months ahead, followed by a gradual improvement as global political stability returns and the energy crisis eases. That assumption has proved unreliable before.
There was more encouraging news on borrowing and debt. The OBR forecasts that borrowing as a share of GDP will fall to 1.6% by 2030/31, compared with 1.9% a year ago. Debt as a share of GDP is forecast to fall to 95%, down from 96%.
The Budget also introduced two notable changes to tax reliefs.
The first was a further 2% increase in tax on income from savings and property from April 2027. This follows the same increase announced by Rachel Reeves last year.
From 2027/28, the savings and property income tax rates will be 24% for basic-rate taxpayers, 44% for higher-rate taxpayers and 49% for additional-rate taxpayers.
The changes have attracted strong criticism from landlords and cash savers. However, the decision to retain the £20,000 Cash ISA allowance will soften the impact for some savers.
The second change was a reduction in the Business Asset Disposal Relief threshold for Capital Gains Tax (CGT), from £1m to £500,000. The Chancellor claimed that three-quarters of claimants would be unaffected, but the reduction will represent a significant tax increase for some business owners planning an exit.
The offsetting measure is a new Founders’ Relief for founders and early-stage investors in UK companies.
The relief will apply a 10% CGT rate to qualifying share disposals, up to a lifetime limit of £10m of gains per individual. It will apply to qualifying disposals made on or after 6 April 2027.
The potential tax saving is significant. However, the qualifying criteria will be important. The proposed rules look difficult to meet, and who ultimately qualifies is likely to attract considerable debate.
Bond and equity markets remained relatively calm following the Autumn Statement.
The economic outlook for the months ahead is less encouraging. Higher energy prices are likely to put further pressure on household finances. The spending review, which is expected to include controversial welfare spending cuts, will bring difficult decisions early in the new year. This follows the Milburn Review, due this autumn.
It would be a difficult time for Andy Burnham to call a snap election. Until he does, however, the Prime Minister remains tied to Sir Keir Starmer’s manifesto commitments, limiting his ability to deliver the more expansive policies he has proposed.
United States
Shares in Alphabet, which owns Google, fell 12.6% on 29 October following weaker-than-expected results. It was the company’s worst one-day fall, wiping out around $500bn in value.
It was also the second-largest one-day loss in US stock market history, behind Nvidia’s $589bn drop in late January 2025.
Artificial intelligence continues to present both opportunities and risks for the heavily technology-weighted US stock market.
The Federal Reserve held interest rates at 3.75%–4.00% following September’s increase. Global politics remains a concern for the central bank, but domestic spending and the labour market continue to show resilience, despite an unexpected small increase in unemployment in September.
The approaching mid-term elections have increased pressure on President Trump to deliver immediate economic improvements for the American public.
Trump spent October campaigning. His approval rating increased slightly towards the end of the month, although this followed a record low across both of his terms earlier in October.
His rhetoric around voter fraud intensified in recent weeks, alongside threats of litigation and a controversial promise to give every adult American $5,000 if the Republicans won.
Trump’s decision to agree a deal with Putin in early October to suspend sanctions and allow Russia to supply diesel to global markets highlights the pressure to deliver immediate results.
Reducing fuel prices quickly was considered more important than maintaining pressure on Russia to end its war in Ukraine, following Trump’s failure to resolve the conflict in the Middle East.
Neither Russia nor Ukraine immediately acknowledged Trump’s claim that peace negotiations were imminent. However, a humanitarian ceasefire has recently been operating in the city of Oleshky, and discussions about peace talks are expected to take place in Abu Dhabi in mid-November.
There remains considerable uncertainty over whether these developments will bring the war to an end.
There was more positive economic news from the US. GDP grew at an annualised rate of 3.4% in the third quarter of 2026, exceeding expectations and improving on the 2.2% growth recorded in the second quarter.
Consumer spending remains resilient despite inflation. It grew by 3.8% in the third quarter, its fastest rate since the fourth quarter of 2024, and accounts for around two-thirds of US economic output.
Europe
On 29 October, the European Central Bank (ECB) held its deposit rate at 2.5%, as expected, following a 0.25% increase in September.
Christine Lagarde said policymakers had discussed another increase but rejected it. There is little evidence that higher energy prices are feeding into wages or inflation expectations.
The ECB also said financing conditions had tightened since its previous meeting, an implicit reference to the rise in sovereign bond yields.
Inflation climbed to 3.8%, its highest rate since September 2023. Following the announcement, money markets were pricing in a 67% probability of a rate increase in December, according to LSEG data.
Christine Lagarde announced in October that she will leave the ECB on 7 February 2027, almost nine months before her term was due to end. She has led the Bank since July 2019.
Lagarde explained that she wanted greater freedom to express political opinions and contribute to wider political debate.
