1 December 2025: The Budget will fail to heal our tax system – Economists

Watching Rachel Reeves being interviewed on television yesterday, I found myself grudgingly admiring her ability not to answer a direct question. She must have been at the top of her class in avoidance. A tax increase isn’t a tax increase if you call it something different. She was repeatedly asked if she agreed that she had broken Labour’s manifesto pledge not to raise taxes for “ordinary working people”, to which she implied that freezing the threshold is not specifically the same thing.

The opposition parties are not going to let the fact that she may also have misled people about the state of the country’s finances go. Reeves has defended her handling of the Budget, as opposition figures claimed she misled the public over the size of the fiscal “repair job” she faces.

In what will be seen as an attempt to prop up his embattled Chancellor, the Prime Minister will later today argue that Reeves has provided economic stability by raising billions of pounds in so-called fiscal “headroom” to protect against future market shocks. Unfortunately, that is not the reason she is being accused of misleading the public. It is the fact that, before publishing her measures, she implied she needed to repair a hole in public finances, which patently did not exist.

Keir Starmer is expected to face questions over Ms Reeves’s conduct, and crucially, whether she broke any rules, after she was accused of misleading the country and the markets ahead of the Budget by failing to disclose that she had a £4bn surplus rather than a £20bn deficit.

The Conservatives have called for an investigation by the City watchdog, the Financial Conduct Authority, while Nigel Farage’s Reform UK has called for a probe into whether the Chancellor broke the ministerial code. Ms Reeves is expected to face questions in the House of Commons over the row. The chancellor insists the PM was kept fully informed of pre-Budget developments and knew there was no black hole.

Also, later today, Bank of England external member Swati Dhingra delivers a keynote speech at the UK Trade Policy Observatory’s annual conference. She is expected to repeat her recent calls for interest rates to be cut to neutral fairly soon, since, by his own admission, the Bank’s Governor believes that inflation has peaked at 4%.

A top economist once cited by Labour ministers as an inspiration for their tax raid on family farms has lambasted the budget, saying it will not 'move the needle' on growth. Arun Advani, Head of the Centre for the Analysis of Taxation, told The Mail on Sunday there had been 'barely a hint of progress' in boosting the economy. He said overhauling the tax system was the only effective way to revive the UK economy.

'For a Government that's supposedly obsessed with growth, we seem no closer to the realisation that our broken tax system is part of the UK's growth problem,' Advani said. 'Major structural reforms, not just rate-changes, or more bolt-ons, are needed to fix it.'

The pound had a curiously quiet week, despite the budget and the furore surrounding it, though the City was impressed by the increase in fiscal headroom, which saw Sterling rally to a high of 1.3268 and close at 1.3642.

The FOMC will convene for its final meeting of the year later, with markets predicting an 87% chance of a rate cut, even though one part of the Fed’s dual mandate remains shrouded in the fog created by the recent Federal Shutdown.

Jerome Powell has never been one to be influenced by anecdotal evidence, much preferring to be persuaded by hard data. However, analysts from Goldman Sachs' Fixed Income, Currency, and Commodities team believe that a Federal Reserve rate cut at the upcoming December meeting is a foregone conclusion.

They pointed out that given the weakening trend in the labour market and the need for risk management, a rate cut at this time represents the correct policy choice, with market pricing already fully reflecting this expectation.

Federal Reserve Bank of New York President John Williams said he sees room to lower interest rates again in the near term, also due to a softening labour market, reviving investor expectations for a December rate cut.

In a speech he delivered Friday in Santiago, Chile, Williams said downside risks to employment have increased while upside risks to inflation have eased. Investors boosted the odds of a rate cut at the Fed’s Dec. 9-10 policy meeting to around 90% after his comments, according to pricing in futures contracts, up from around 35% earlier.

Next year is expected to see a new Federal Reserve Chair and an anticipated decline in short-term interest rates across the Federal Open Market Committee’s eight scheduled meetings. That’s according to fixed-income market expectations, as assessed by the CME FedWatch Tool.

The FOMC can set interest rates whenever it chooses, a power it has used in the past during economic emergencies. However, in a typical year, the FOMC follows a calendar of eight scheduled meetings to set interest rates. For 2026, those decisions will be announced on January 28, March 18, April 28, June 17, July 29, September 16, October 28, and December 9. The FOMC will update its Summary of Economic Projections at alternate meetings starting with March.

Treasury Secretary Scott Bessent wants the era of Fed-watching to end. They should ‘move back into the background’ and make fewer speeches, he says.

President Trump is expected to nominate a Federal Reserve Chair soon, to take office in 2026, who supports his drive for lower interest rates. Kevin Hassett is the most likely nominee.

This may add impetus for lower rates in 2026. For example, Trump appointed Stephen Miran this year, and he has been consistent, so far, in voting aggressively for lower rates.

The dollar index lost most of the ground it had gained the previous week following Williams' speech. It fell to a low of 99.38 and closed at 99.45.

Analysts report a painfully slow manufacturing recovery in the Eurozone, with industrial confidence remaining weak. The European Commission’s November Economic Sentiment survey, published last week, also signals a painfully slow manufacturing recovery.

Overall, this confirms the view that Eurozone growth is likely to remain near-stagnant rather than robust, as the economy continues to absorb the impact of US import tariffs. Yet with the labour market cooling and real wage growth slowing, household spending will likely weaken in the coming quarters."

"On the positive side, lower energy prices, slightly easier financing conditions for businesses, and ongoing investment needs in energy transition, automation, digitisation, and defence still offer a path to a production-led recovery in 2026."

This analysis does not chime with the views of ECB President Christine Lagarde, who said the European Central Bank is positioned with borrowing costs currently at the right level.

She said the scope of risks to the inflation outlook has narrowed, but upward pressure on prices could re-emerge if the US were to increase tariffs or supply chains were disrupted. Lagarde expressed optimism about the euro-area expansion, saying it has been more resilient than anticipated and that she wouldn't be surprised if the growth rate ends up even higher by the end of the year.

"The accounts of the October meeting revealed that some policymakers held the view that the cutting cycle has concluded, although some of their peers countered that “it is important to remain open-minded on the possible need for a further cut.”

A Eurozone inflation reading that’s likely to stay close to 2% should be enough to satisfy officials that they can avoid tweaking interest rates in December.

Consumer prices probably rose 2.1% in November from a year earlier, according to the median of 29 forecasts in a Bloomberg survey ahead of tomorrow’s release. The underlying measure, which strips out volatile elements such as energy, is seen remaining at 2.4%.

Such readings on the final inflation numbers before the European Central Bank’s Dec 18 decision might harden policymakers' resolve to keep borrowing costs unchanged. That would leave them able to focus instead on their pivotal quarterly forecasts, featuring the first outlook stretching as far as 2028.

Germany’s unemployment rate edged lower in November, according to the Federal Employment Agency, though officials feel that further progress may be difficult given the market's sluggishness. The jobless rate fell to 6.1% from 6.2% in October. The total unemployment in Germany is 2.855 million, down by 26K.

The Euro chart is a mirror image of the dollar index, reinforcing the view that the dollar is currently the market's primary driver. The single currency regained the ground it had lost the previous week, rallying to a high of 1.1613 and closing at 1.1600.

Have a great day!