Market Review 1st December 2025
- Simplicity News Desk
- Dec 1, 2025
- 4 min read
Everything you need to know, Simplified!
Summary
Rachel Reeves delivered a smorgasbord Autumn Budget, opting for multiple small tax rises rather than one clear revenue anchor - a strategy that soothed Labour backbenchers but muddied the market signal
The fiscal mix front-loads spending and defers the pain, pushing the tax burden higher while leaving structural issues untouched
Risks to the UK’s high-earning base are rising, with the policy direction edging further down the wrong side of the Laffer curve (implying a negative relationship between tax rates and revenue) as affluent individuals continue to leave the UK
Markets reacted mildly positively, supported by increased near-term fiscal headroom and the Debt Management Office’s (DMO) cancellation of long-dated gilt issuance; UK mid/small caps rose 3.2% and gilt yields eased
Week Ahead: Eurozone inflation expected to hold steady while the US Core Personal Consumption Expenditures (PCE) release is unlikely to resolve the US Federal Reserve’s (Fed) easing dilemma, with political noise increasingly shaping the US monetary policy narrative.
Market Review
March of the Welfare State
Chancellor Rachel Reeves opted for a smorgasbord of revenue-raisers rather than a single, decisive shift such as a broad-based income-tax increase
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The government’s constant oscillation on what would or would not appear in the Budget created a lot of speculation and uncertainty heading into it. Several much-trailed proposals evaporated in the run-up: a cut to the tax-free pension lump sum? Dropped. An income tax rise on earned income? Abandoned. All within a matter of months.
The pick-and-mix approach may have soothed Labour backbench sensitivities, but it was a riskier strategy in that it muddied the market signal - many small levers instead of one clear policy anchor.
The Chancellor unveiled a raft of personal and business tax changes, including higher investment income taxes, the introduction of National Insurance contributions (‘NIC’) on salary-sacrificed pensions, and a “mansion tax”.
Some measures - such as the so-called “mansion tax”, a council-tax surcharge on properties over £2m - are largely symbolic. It will raise less than half a billion pounds and sends exactly the wrong signal to the UK’s wealth creators and investors. Others, like freezing personal tax bands and employer NIC thresholds for three years from 2028–29, will exert far more pressure on households’ take-home pay.
In practice, the package front-loads spending and back-loads the fiscal hangover. The tax burden marches higher, with most of the real adjustment conveniently landing after the next General Election. Welfare spending rises by £73bn to £406bn over five years, funded by higher taxes.
This does nothing to address the UK’s structural challenges. Productivity remains mired, and the policy mix risks accelerating the erosion of the UK’s high-earning base - a slow walk further down the wrong side of the Laffer curve, where higher tax rates chase away the very revenue they seek. More wealthy and high-earning individuals are leaving the country than ever.
Gilt markets largely took the Budget in their stride. Markets trade the near term, and with fiscal headroom (also known as fiscal rules - the amount of flexibility the government has to increase spending, cut taxes or absorb a higher borrowing need without breaking these rules) nudged higher, the reaction was mildly positive. The rally at the long end was helped by the DMO’s decision to cancel long-dated issuance for the remainder of the year. The 10-year gilt yield ended the week 0.11% lower at 4.44%.
Projecting a brighter macro trajectory for the UK after this Budget is difficult. That said, it could have been far worse - and that simple fact, alongside the removal of uncertainty, may be enough to support UK equities as we head into the Christmas period. UK mid and small cap equities rose 3.2% last week. Sterling strengthened 1.0% against the US dollar.
To summarise, the removal of uncertainty and a ‘bad but not disastrous’ Budget facilitated a positive market reaction. The Chancellor did enough to keep the bond vigilantes at bay - though the market’s reaction function was driven by short-term fiscal headroom rather than any improvement in the medium- or long-term outlook and the long-term challenges remain very much unaddressed. The welfare state marches on.
The week ahead
Tuesday: Eurozone inflation
Our thoughts: Headline inflation is expected to hold at 2.1% in November before slipping marginally below target in 2026. With the deposit rate at 2.0%, the European Central Bank is effectively sitting at neutral. They could cut further, but for now seem content to sit on their hands - preserving optionality for next year while signalling that the inflation fight is broadly under control.
Friday: US Core PCE Inflation
Our thoughts: The US remains in an unusual position: the Fed wants to ease to take pressure off the lower leg of its K-shaped economy - squeezed consumers, smaller businesses and the housing market - but the broader macro backdrop and financial markets hardly warrant it. Inflation risks are finely balanced, and this week’s Core PCE print is unlikely to resolve the debate. The delayed release (a hangover from the government shutdown) is expected at 2.8% for September, keeping the Fed stuck in the same bind. Political noise is increasingly dominating the narrative, with Kevin Hassett now the frontrunner to replace Powell as Chair next year. Hassett is seen as the most MAGA aligned as well as a highly qualified candidate. The Fed is still expected to cut rates at next Wednesday’s meeting.
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