Inside Rachel Reeves’ Red Briefcase

Editors’ Note: MarketMinder prefers no political party nor any politician. We assess developments for their potential economic and market impact only.

At last, after weeks of speculating, UK Chancellor of the Exchequer Rachel Reeves has stepped out of 11 Downing Street with the customary red Budget box and revealed its contents: An estimated £70 billion in new annual spending, £40 billion in new taxes and £32 billion in extra annual borrowing. The takes on this are many and varied—and largely sociological. For investors, we think there is a very simple takeaway: Uncertainty, elevated as the government floated numerous policy trial balloons, is at last dropping. Whatever your opinion of the new fiscal measures, stocks should benefit from simply having clarity, not to mention the tax hikes being smaller than feared.

In pounds, UK stocks entered Wednesday pretty much flat since July’s election. We wouldn’t read a ton in this, as European stocks are also flattish, but we haven’t seen the rally we would generally expect from falling political uncertainty. Why is harder to discern than what, but the fiscal policy guessing game is a likely culprit.

Since the campaign, Reeves and Prime Minister Keir Starmer have signaled taxes would rise. It wasn’t a flagship campaign pledge—VOTE FOR US AND WE WILL RAISE YOUR TAXES isn’t exactly a winning banner—but it was implicit. They pledged to raise public investment, spending and wages, and they paid lip service to requisite deficit reduction. Given the money for new spending and investment would have to come from somewhere, higher taxes seemed a foregone conclusion.

But society didn’t know which taxes would rise or how much. Campaign materials pledged not to raise taxes on “working people,” which meant not raising VAT, national insurance contributions or income tax rates (presumably on the lower income bands). This left capital gains taxes, property sale duties, inheritance taxes, carried interest and other avenues as targets, but this process of elimination didn’t add clarity. For one, Starmer and other government ministers seemed unable to define “working people” when pressed, and several outlets noted workaday folks tend to own stocks and might have scratched and saved to invest in a rental property to supplement their income. So questions abounded.

Adding to the confusion, the government floated several tax proposals through Treasury leaks. This is a time-honored tradition: To test the waters, the government will leak an idea and see how markets and analysts react. If the feedback isn’t good, they can tweak and water down as needed. And if it is good, they can pencil it in and move on. It is a fine political trick, but the sheer volume of leaked ideas raised more questions than it answered, and it amped up headline chatter and debate over what the possible moves could mean.

In general, stocks don’t like this sort of uncertainty. When people don’t know what future taxes will be, it makes planning difficult. Businesses and investors tend to enter wait-and-see mode, unwilling to take risk until they have more answers. There was a lot of anecdotal evidence of this in the UK. There was also a lot of anecdotal evidence of people trying to front-run changes, whether by selling UK stock funds, dumping rental properties or taking lump-sum pension distributions early, all to lock in lower rates ahead of potential changes. Across the country, risk aversion was up.

But higher uncertainty has a happy flipside: falling uncertainty. In this case, it isn’t just that businesses and individual investors now know what they are dealing with. It also happens that the new taxes aren’t as onerous as feared. This is just one market driver, but markets tend to like it when tax policy gets watered down from initial expectations.

For example, for months, headlines have warned that Reeves could scrap preferential capital gains tax rates, instead equalizing them with income tax rates. That would have taken rates from 10% and 20%, depending on income levels, to 20%, 40% and 45%. Some warned these high rates would apply to realized gains on all assets, including second homes, rental properties and privately held businesses.

But the actual increase wasn’t so draconian. The lower rate will rise from 10% to 18%, with the higher rate rising from 20% to 24%. The rate on the sale of second homes will stay at 18% or 24%, depending on the seller’s income. Business and agricultural asset sales less than £1 million will be tax-free, and a 20% rate will apply above this. So yes, rates will rise, but nowhere near to the degree feared. This is the kind of relief stocks generally welcome.

The remaining tax hikes are stealthier. As expected, Reeves extended the prior government’s income tax band freeze until fiscal 2028/2029, which will drag more income into higher brackets as inflation continues lifting wages and salaries—a well-known, long-running stealth tax hike. While employees’ national insurance contributions won’t rise, employers’ contributions will jump from 13.8% to 15.0% next April (this is the UK’s equivalent of the US’s payroll tax). Smaller businesses will benefit from a higher allowance, but larger firms’ allowance will drop. Oh, and with the minimum wage set to rise 6.7% next April, the employer national insurance tax base is about to jump—albeit temporarily, as the Office for Budget Responsibility (OBR) expects the higher wage and payroll tax to reduce hiring.

Elsewhere, the tax rate on carried interest, which primarily affects hedge and private-equity fund managers, will rise from 28% to just 32%, still well below the higher income tax rates. Surprising no one, the oil windfall profits tax will rise from 35% to 38% and will sunset in March 2030 instead of March 2029. And the non-domicile resident tax status will cease to exist in April, ending preferential treatment for wealthy ex-pats residing in the UK.

But some taxes will actually fall! Pubgoers will enjoy a slight reduction in the duty on draft beer (which prompted several lists featuring the best cask ales to try), while brick-and-mortar retail, hospitality and leisure businesses will see lower rates from fiscal 2026/2027 (effectively a commercial property tax that disproportionately affects physical retail). We reckon many shop owners will hoist a slightly cheaper pint to this news, benefiting doubly.

As for the spending side, there were minimal surprises. Most of the increase will go to public services and wages, which the government has long telegraphed. Reeves also earmarked £1 billion for investment in aerospace, £2 billion for electric vehicles and £500 million for life sciences, plus £20.4 billion in research and development spending next year. And to manage this under the official fiscal constraints, Reeves confirmed the official debt measure will become public sector net financial liabilities, which offset debt partially with investments. This procedural change attracted much discussion on econo-Twitter and such, but changes little in the real world—UK debt was already in fine shape, as we showed this summer.

The OBR’s official scoring projected this Budget will have minimal effect on GDP growth over the next five years. It estimates a small short-term boost from higher spending, but in the medium term it sees the higher tax burden counterbalancing higher spending. That is a logical take, but we always recommend taking these forecasts with many grains of salt. They use a host of assumptions and straight-line math and can’t account for actual real-world developments. Plus, in this globalized world, UK growth is less dependent on local public spending and tax rates than on how the entire global economy is doing. Global growth has pulled many a high-tax nation along in the past, and their taxes were a lot higher than what the UK is about to swallow.

Overall, we don’t see anything here as make or break for the UK’s economy or markets. The measures create winners and losers, as all fiscal policy changes do, but none of the losers are huge or unexpected. That simple reality alone should enable markets to move on. Politics is just one factor affecting UK stocks—the country’s sector concentrations have a large bearing on returns, too—but fiscal clarity should be a modest tailwind.