Pound Sterling Budget 2025 Reactions: Gains Build As Reeves Restores Headroom

The British pound is recovering from earlier losses after markets gave a cautious welcome to the government's efforts to restore fiscal credibility.

Pound sterling is holding a daily gain against the euro and dollar after the government did enough in Budget 2025 to reassure markets it has a grip on its finances.

How so? The headline of the day, we feel, is that the OBR was quite generous to the government by cutting its growth forecasts to a limited degree.

🔼 This means the tax increases Reeves announces will ensure her fiscal rules are met, while Chancellor Rachel Reeves will have more headroom, to the tune of £22BN.

The development should give financial markets enough breathing space not to fret about the UK's debt for a while, and ultimately should take some pressure off Sterling.

To achieve that additional headroom, the following tax hikes were announced:

1. Tax thresholds frozen
2. National insurance on salary sacrifice pensions
3. Electric Vehicle pay per mile charge
4. Gambling tax
5. Freeze to fuel duty
6. Two child benefit limit scrapped

📉 The pound to euro exchange rate now trades at 1.1390 (+0.13%), having been as low as 1.1350. The pound to dollar exchange rate fell to 1.3123 before recovering to 1.3195 (daily gain of 0.23%).

There is £9BN in additional welfare spending earmarked in the budget.

In addition to raising taxes, the OBR says Rachel Reeves's spending policies will require increased borrowing every year in the forecast horizon.

🔄 Unfortunately for the Chancellor, the OBR says there will be no productivity upgrade from the measures in the budget.

"We have assessed that none of the policy measures in this Budget have a sufficiently material impact to justify adjusting our post-measures potential output forecast," says the OBR.

This is significant in that it points to persistent economic growth disappointments through the forecast horizon, making the odds of further tax raids in the coming years more likely.

Economists who have read through the budget plans are also raising concerns about the credibility of the budget's commitment to achieve a balanced budget in four years' time. 

The problem is that in order to achieve this, there will be a requirement for significant spending cuts at the end of the horizon. Is this feasible for a government that will be hoping to be re-elected?

This is an important point for debt markets, which need to see a credible path forward for UK finances.