Tax plans and OBR credibility trigger lender caution
Investors welcomed the Budget with a modest fall in UK government borrowing costs and slight currency gains, yet analysts at Oxford Economics say that outlook may shift when markets revisit tax rises planned for the 2029–2030 period.
Recent lending data shows mortgage approvals reached a nine-month high in September as quoted mortgage rates eased over the last year. Approvals are forecast at 65,900 in October, unchanged from the previous month. Net secured lending of £5.1bn remains almost double the average seen over the past couple of years.
OBR housing forecasts point to transaction volumes rising from about 1.1m in 2024 to around 1.3m by 2029, while average effective mortgage rates are expected to increase gradually as cheaper fixed-rate deals expire.
The fiscal stance combines a limited short-term loosening with larger tightening later in the forecast. Oxford Economics’ analysis shows the fiscal impulse moving into negative territory in the later years of the projection period.
Markets initially responded with the 10-year gilt yield about 10bps lower than at the start of the week, alongside a marginally stronger pound.
The consolidation is concentrated toward the end of the decade, including a £17bn adjustment equal to 0.5% of GDP in 2029–2030, when the next general election is due to take place. Oxford Economics states that confidence may erode if investors question the durability of that commitment, which could lead to higher risk premia and pressure on sterling.
Government spending restraint was not a central feature of the Budget. OBR projections show the spending-to-GDP ratio higher at the end of the period than last year, leaving most of the fiscal adjustment reliant on taxation.
Tax threshold freezes extended from 2028–29 are expected to increase the number of basic, higher and additional-rate taxpayers. By 2030–31, tax revenue is forecast to reach 38.3% of GDP — a historic high.
Oxford Economics notes the OBR revised its medium-term productivity estimate to 1.0% growth.
Recent population data reported lower net inward migration than assumed in OBR modelling, prompting questions over whether its growth projections will be achieved.
The Budget did not include major new measures intended to increase medium-term growth.
Confidence in institutions was also tested by the early publication of the OBR’s economic and fiscal outlook online before the Chancellor delivered her statement — an error now subject to an internal inquiry, according to The Guardian.
Separately, the Financial Times reported concerns that the incident risked damaging trust in the OBR’s judgments at a time when official forecasts influence tax decisions.
Oxford Economics maintains that monetary policy expectations remain broadly unchanged. The Monetary Policy Committee could cut rates at one of its next two meetings, which would reduce borrowing costs economy-wide, including in mortgage markets.
