1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 76
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
with renewed commitments to see borrowing fall as a share of GDP over time and for the deficit
to turn into surplus by the end of the decade. However, this improvement rests on a weaker
growth backdrop, and fiscal consolidation (e.g., tax threshold freezes) is backloaded to 20282030 – leaving it vulnerable to political back-pedaling. Alongside consolidation, the Budget
sought to preserve a pro-investment narrative, with public investment plans of around £120bn
remaining intact, with continued emphasis on infrastructure, energy security, defence, and
strategically important sectors. On net, however, the Budget prioritizes stability over stimulus,
offering limited near-term support to activity.
To offset softer growth and rising borrowing needs, the government outlined a sizeable revenueraising package that will lift the tax burden to around 38% of GDP, the highest level on record,
with measures notably including extended freezes to income tax and National Insurance
thresholds. While these steps underpin near-term fiscal credibility and reduce sovereign risk, they
also entrench a structurally high-tax environment that is likely to weigh on household disposable
incomes and business sentiment over the medium term.
Tax revenue could climb to unprecedented highs
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Tax revenue as % of GDP
37
35
33
31
29
27
25
1990
1994
1998
2002
2006
2010
2014
2018
2022
2026
Source: OECD, Scotia Wealth Management | Dashed line is OBR’s forecast
Financial markets remain sensitive to the balance of higher taxation and tighter fiscal settings
(albeit backloaded) against some support from public investment plans and private incentives,
with limited scope for additional fiscal support if growth disappoints. Gilt yields were volatile
around the Budget, reflecting uncertainty over the growth implications of higher taxation versus
reassurance from a stronger fiscal framework. While recent decisions may have eased immediate
concerns around fiscal discipline, they have not resolved longer-term questions over debt
sustainability and the growth outlook, leaving term premia susceptible to renewed volatility as
political and economic conditions evolve.
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