Goldman Sachs: The UK Budget - FJElite

The Chancellor’s fiscal headroom is expected to fall from £24bn to around £15–16bn before next week’s Autumn Budget, as higher borrowing costs and weaker growth forecasts outweigh some improvement in wage projections. Economists expect a relatively low-key package, with around £5bn of tax increases alongside further cost-of-living support, modest departmental spending adjustments to help fund defence and additional investment. Potential revenue measures include anti-avoidance initiatives, extending the National Insurance base and increasing the bank surcharge.

A higher bank surcharge would weigh on UK lenders’ profits. Each 1 percentage-point increase is estimated to reduce 2028 net profit forecasts by around 0.5% for Barclays and just over 1% for Lloyds and NatWest. Returning the surcharge to its former 8% rate from 3% could therefore create a 2–3% headwind for Barclays and 6–7% for Lloyds and NatWest, although the previous higher rate applied when corporation tax was lower. UK banks already trade at a discount to European peers despite stronger returns on equity, which analysts attribute largely to a higher UK-specific risk premium. A post-Budget re-rating would depend on improved confidence in the economy and reduced perceived risk. Potential capital gains tax changes are viewed as largely immaterial for UK equities, given substantial overseas ownership and the prevalence of tax-exempt or differently taxed institutional holdings.

Overall, the Budget is expected to leave the public finances under pressure, with the OBR’s borrowing projections likely to rise by around £12bn a year on average and post-measures fiscal headroom settling near £16bn. The more significant challenge may come with next year’s Spending Review: existing departmental budgets appear tight and could require upward revisions, but funding higher spending will be difficult without stronger growth or changes to the government’s tax pledges.