25 November 2025: The budget will test the Labour government’s credibility

There is not a single individual, family, or business that is unaffected by the budget that the Chancellor will present to Parliament tomorrow. Rachel Reeves is likely to begin her speech with around 15 billion pounds of giveaways, including the scrapping of the two-child benefit allowance.

Once that is done, she will focus on where the funding will come from to pay for the giveaways and fill the black hole she and the OBR have identified in the nation’s finances.

Rachel Reeves is expected to reveal that the UK’s economic growth forecasts have been downgraded in each of the next five years, despite her efforts to boost output.

The Office for Budget Responsibility has reportedly downgraded its forecast for UK growth in each year to 2030-31 as part of a review undertaken before the budget, which will argue that a lack of investment under Tory administrations has undermined the UK’s potential economic expansion.

The Chancellor’s efforts to increase growth will be unable to offset annual downgrades by the OBR, severely undermining Labour’s chances at the next election in 2029.

Unusually, the Treasury refused to comment on the leak. A spokesperson said, “We know there is more to do. That’s why we are investing £120bn more than the previous government in national infrastructure, cutting red tape and unnecessary regulation for businesses, introducing a new planning bill and securing new trade deals across the globe.”

There are no "hard facts” that Reeves will be able to use to “blow her own trumpet”, given the current fiscal situation. However, she will “squeeze every last drop” of national benefit from what is likely to be a particularly dry statement.

Reeves has battled to convince the OBR that measures in her first two budgets will turn the situation around and improve growth, allowing for more generous settlements closer to the election. Treasury officials are likely to be concerned that the OBR believes the economic outlook remains subdued despite extra investment.

In her search for extra taxes, Reeves could hit more than 100,000 high-value properties with a levy that applies to those worth more than £2m, raising £400m to £450m, the Times has reported.

She is also expected to freeze income tax thresholds for an extra two years to 2030, which would pull more people into higher tax bands as wages rise.

She is expected to make several changes that will affect the real estate sector. The National Residential Landlords Association says the Budget on Wednesday represents the biggest challenge of Reeves’ political career.

It said in a statement that: “She could take the easy route and introduce a set of tax measures that penalise our sector for short-term revenue gains, disincentivise investment and further squeeze those of us still providing homes. “Or she could break with recent orthodoxy and use the tax system to incentivise long-term investment in good quality, secure homes. Every pound a landlord is encouraged to invest drives local economic activity, adds to supply, and improves stock.”

The association says its members back the private rental sector’s contribution towards labour mobility, providing homes for key workers, and supporting opportunity.

And it claims that tax increases that reduce rental supply and drive up costs are not just bad for landlords; they are economically damaging and ultimately harm tenants by raising rents and reducing choice.

In 48 hours, it will all be over for another year. The Budget is a reminder of the devastation caused by the flooding that has affected the UK over the past few years. It starts with the hope that it won’t be as bad as expected, which leads affected people to stay glued to the broadcast as it unfolds, followed by months of cleanup operations.

The pound traded in a narrow range yesterday, although it did make a little ground. It reached a high of 1.3118 and closed at 1.3108.

The right-wing press in the United States is continually sowing the seeds of doubt over Jerome Powell’s ability to manage the Federal Reserve and, in particular, create a degree of harmony among members of the FOMC.

Broadly speaking, the 12 Regional Fed Presidents support a cautious approach to interest rate cuts, since they feel inflation is barely under control, while they remain concerned that the full effect of “Trump’s Tariffs” has not yet worked its way through the system.

The Fed Governors who make up the rest of the FOMC have had two carrots dangled in front of their eyes. The first is their elevation to membership on the rate-setting committee. At the same time, Trump and Treasury Secretary Steven Mnuchin continue to tease Governors with the possibility that one of them may be chosen to replace Powell when his term ends next May.

Once such an individual is Fed Governor Christopher Waller, who said yesterday that he’s advocating an interest-rate cut in December; however, the Central Bank can probably take a more meeting-by-meeting approach starting in January once it receives a flood of economic data.

Oddly, those opposed to Powell’s cautionary approach are now advocating the meeting-to-meeting approach that the Chairman has been criticised for taking over the past year.

Waller continued, “My concern is mainly the labour market, in terms of our dual mandate, since inflation has been the main driver recently.

Investors put the chances of a rate cut at the Fed’s upcoming Dec. 9-10 policy meeting at about 70%, according to futures contracts. Fed officials appear deeply divided over whether another reduction will be appropriate following cuts in September and October.

Employment statistics for October and November are scheduled to be released on Dec. 16, and November consumer price data are due Dec. 18, after the last FOMC meeting of the year.

“If it suddenly shows a rebound in inflation or jobs, or the economy’s taking off, then it might give concern,” he said. “I still don’t think the labour market is going to turn around in the next six to eight weeks.”

Waller is currently under consideration by the Trump administration as a candidate to succeed Jerome Powell as Fed chair next year. He said he had a “great meeting” with Treasury Secretary Scott Bessent, who is leading the interview process, about 10 days ago.

The dollar index is also trading in a narrow range as it consolidates above the 100 level. Yesterday it traded between 100.28 and 100.01, closing at 100.20.

As most of the chatter that followed the publication of Q3 results for quoted firms in the U.S. continues to be about the way in which AI will affect both productivity and employment, ECB President Christine Lagarde chose a speech she made yesterday in Bratislava to voice her concerns that a delay in embracing artificial intelligence could “jeopardize” the continent’s future, urging barriers to its adoption to be swiftly lifted. Her comments add to growing fears that Europe is lagging behind the United States and China in AI, with proponents of the technology blaming issues ranging from overregulation to underinvestment.

“We need to remove all the obstacles that stop us from embracing these transformations. “Otherwise, we risk letting the wave of AI adoption pass us by and jeopardise Europe’s future.”

Lagarde, who heads the Central Bank for the 20-nation euro area, conceded that Europe had “already missed the opportunity to be a first mover in AI”. But if the continent deploys the technology decisively across its key industries, “Europe can turn a late start into a competitive edge”, she emphasised.

She listed several barriers to rapid adoption in Europe, ranging from fragmented regulations to the high cost of energy, which makes it expensive to run the enormous data centres that power AI.

Bureaucratic obstacles, such as delays in obtaining permits, made it harder to build up data centres quickly, and the region’s computing power, she said.

As of last year, Europe’s data centres had computing capacity of just 16 gigawatts, compared with 48 in the United States and 38 in China, according to a recent study by German digital business association Bitkom.

Facing mounting concerns from businesses and governments that regulations are hobbling the digital sector and hampering growth, the EU last week proposed rolling back key AI and data privacy rules. Privacy defenders, however, were unhappy with the proposed changes, arguing they weaken safeguards protecting Europeans’ data. European governments have also been stepping up calls to reduce over-reliance on US tech giants and strengthen the local industry, particularly at a time of uneasy ties with Washington under the Trump administration.

Echoing these sentiments, Lagarde urged Europe to “diversify critical parts of the AI supply chain and avoid single points of failure. “If our data spaces use technology stacks that are owned and governed outside Europe, we deepen, rather than reduce, our strategic dependencies.”

With falling expectations and only somewhat improving current assessment, the November IFO index suggests that the German economy will remain deeply stuck in stagnation at year-end.

This does not really come as a surprise, but Germany’s businesses have downgraded their previous optimism. The IFO index just came in at 88.1 in November, from 88.4, correcting a rather unexpected improvement last month.

While the current assessment component increased somewhat, the expectations component brought down the headline index. The combination of a still-weak current assessment component and reversed expectations is another example of an economy that remains deeply stuck in stagnation.

The Euro is consolidating at lower levels again, though its upside potential remains limited. Yesterday, it reached a high of 1.1550 and closed at 1.1552.

Have a great day!