UK Budget Reaction Summary

Date: 28 October 2026

Author: Kathleen Brooks, Research Director UK

Key Takeaways

• UK bank stocks have risen as the new banking tax surcharge is lower than expected.
• The Office for Budget Responsibility (OBR) has raised inflation forecasts while reducing the 2027 growth forecast by 0.5%.
• UK borrowing is projected to increase by more than £11 billion per year due to higher inflation.
• The UK tax burden is expected to reach a record high of 42.9% of GDP by 2031-2032.

Market Reactions

The bond market has reacted positively to the budget, rating it a decent B+. The focus of the budget was on growth rather than benefits, with no immediate cuts to government spending. The bulk of announcements were anticipated, with a surprise introduction of a new Individual Savings Account (ISA) expected to be detailed later.

Banking Sector Performance

Following the announcement of a lower-than-expected banking tax surcharge (increased to 6% instead of 8%), bank stocks surged. Major banks such as Lloyds, NatWest, Barclays, and Standard Chartered saw gains of approximately 3%. However, these gains may be limited as banks are expected to contribute more to cover a £100 giveaway for households in lower council tax bands to assist with rising energy bills.

Economic Forecasts

The OBR has revised its inflation forecasts upwards and reduced the growth forecast for 2027 by 0.5%. Growth is now expected to slow to 1% next year, down from 1.25% this year. This increase in borrowing, projected to be over £11 billion more annually, is primarily due to higher inflation rates, which could hinder the UK’s debt consolidation plans.

Debt and Tax Implications

Debt interest costs are expected to rise by £15 billion this year due to increased bond yields. The OBR has indicated that the UK’s tax burden will reach a record high, with tax receipts projected to be 42.9% of GDP by 2031-32. This increase is attributed to higher welfare spending and pensions, raising concerns about the political implications for the current government.

Political Considerations

The rising tax burden poses a challenge for the Labour government, particularly for Prime Minister Burnham, as he prepares for a potential early election. The government has committed to not increasing income tax, VAT, or corporation tax, yet the tax-to-GDP ratio is expected to exceed pre-pandemic levels by 6%.

Conclusion

The overall sentiment from the budget is one of cautious optimism, with a focus on increased spending and higher taxes. The introduction of the new starter ISA adds a fresh element to the budget, but the long-term implications of rising debt and taxes remain a concern for the government and the economy.