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Investing.com -- The UK government is heading into what Stifel describes as the most politically fraught Budget in decades, constrained by its own 2024 election pledges while facing mounting pressure to plug a widening fiscal gap.
Last year’s failure to rein in welfare spending after a Conservative backbench revolt has left ministers with little choice but to raise taxes again — potentially by an amount close to the £41.5 billion increase delivered at the previous Budget.
The difficulty is that Labour’s manifesto committed to freezing the headline rates of income tax, national insurance, VAT and corporation tax. Those four pillars account for roughly two-thirds of total tax revenue, meaning the scope for raising money elsewhere is narrow.
Chancellor Rachel Reeves has tested the waters in recent weeks, at one point suggesting income-tax rates might have to rise before quickly reversing course and reaffirming the party’s red lines.
Stifel’s research team led by John Cahill notes the resemblance to George H. W. Bush’s 1988 promise of “no new taxes,” which he later abandoned — and paid a political price for.
Against that backdrop, the Budget will come down to deciding “which shoulders will be deemed the broadest.” Stifel’s research maps the potential impact of a wide range of tax options across major U.K. sectors, categorising each as low, medium or high risk depending on how exposed companies are to possible policy changes.
Measures under discussion include shifts to income-tax thresholds, capital-gains tax, inheritance-tax adjustments, business rates, windfall taxes, pension changes, ISA reform, a minimum-wage increase and a potential U.K. “exit tax.”
The analysis shows uneven effects. Investment funds, building materials, pubs, business services, housebuilders and real estate appear particularly sensitive to several of the options under review, while sectors such as tech, energy, industrials and healthcare face more mixed exposure.
With no fiscal headroom to offer tax cuts, Stifel expects few direct beneficiaries from the Budget. Markets may instead see “relief rallies” if the announcement clears uncertainty. A credible plan to raise enough revenue without undermining growth could push gilt yields lower — a move that would support U.K. equities more broadly.