"While this Budget addresses some fiscal risks and increases the margin held against the Government's fiscal targets, it still leaves the UK public finances relatively vulnerable to future shocks. Even if the Government were to meet its fiscal rules and reduce overall borrowing to below the roughly 2½ per cent of GDP it invests by the end of the decade, this would only reduce the UK's deficit to the level that the average advanced economy had already achieved several years ago."
(OBR Economic and Fiscal Outlook November 2025, at paragraph 1.30)
While the immediate fiscal crisis scenarios have been avoided, multiple underlying structural weaknesses—from productivity stagnation, unchanged government spending and elevated debt burdens—continue to constrain the economy's potential.
Inflation and Monetary Policy: Gradual Disinflation
Consumer price inflation has shown encouraging signs of moderation, with CPI falling to 3.6% in October from 3.8% in September. Core inflation measures have similarly eased, with core CPI declining to 3.4% and services inflation softening to 4.5%. The Bank of England now judges that inflation has peaked, supported by increasing slack in the labour market and the restrictive stance of its monetary policy.
However, the path back to the 2% target remains gradual and uncertain. The Monetary Policy Committee's November decision to hold Bank Rate at 4.0% reflected a finely balanced assessment, with four members voting for a cut. While the risk from inflation persistence has diminished, concerns about weaker demand have become more apparent. The Bank signals that further rate reductions will depend on continued progress in disinflation, with markets expecting a gradual downward path through 2026.
Labour Market: Softening Amid Policy Uncertainty
The labour market continues its gradual loosening, with unemployment rising to 5.0% in the three months to September—the highest level since early 2021. Employment has declined by 22,000 on the quarter, while payrolled employees fell by 117,000 over the year. Job vacancies have declined for 39 consecutive periods, falling most recently to 717,000 and remain well below pre-pandemic levels.
Wage growth, while still elevated, shows signs of moderation. Regular pay growth eased to 4.6% in the three months to September, with total pay growth at 4.8%. The public sector continues to see stronger pay when adjusted for inflation, highlighting ongoing cost-of-living pressures for households. wage increases at 6.6%, partly reflecting timing effects from pay settlements. Real wage growth remains modest at 0.5% for regular pay when adjusted for inflation, highlighting ongoing cost-of-living pressures for households.
Economic Growth: Muted Momentum
GDP growth has moderated from the stronger start to 2025, with the economy expanding 0.3% in Q2 following 0.7% growth in Q1. Services output rose 0.4%, supported by information and communication sectors, while construction grew 1.2%. However, production output declined 0.3%, with significant falls in electricity and gas supply weighing on overall performance.
The OBR has now revised its growth forecasts, projecting 1.5% for 2025 before moderating to 1.4% in 2026. More concerning though is the downgrade to medium-term productivity growth from 1.3% to 1.0%, reflecting persistent structural weaknesses in the economy. This productivity challenge—where the UK has seen the largest fall among G7 nations since 2008—continues to constrain the economy's potential growth.
Consumer Behaviour: Cautious Optimism
Household spending grew a modest 0.1% in Q2 2025, with year-on-year growth of 1.1%. Consumer confidence has shown tentative improvement, with the GfK index rising to -17 in October, though sentiment remains negative. The household saving rate peaked at 6.5% in 2025, reflecting continued precautionary behaviour, though it is forecast to decline as economic conditions stabilise.
Real household disposable income growth is now projected to slow sharply from 3% in 2024-25 to just 0.5% in 2025-26, well below the last decade's average. This squeeze on living standards, combined with frozen tax thresholds, will continue to limit consumer spending power and have a knock-on negative impact on the retail and hospitality/leisure sectors.
The Budget: ‘Phew’... or Too Few?
As Chancellor Rachel Reeves stood up at the despatch box and delivered the Budget in person, rather than via the clickbait social media and leaks-to-the-media that have dominated the national conversation over recent months and put a pause on any serious investment decisions by businesses, the collective sigh of relief from our industry was almost audible.
Not only did this feel like how politics at the highest level should be conducted; it wasn’t nearly as bad as many had predicted.
No major stamp duty land tax hikes. No serious capital gains tax changes. A ‘mansion tax’ that really isn’t a tax on mansions (albeit a new £2.5k-£7.5k prime property holding cost isn’t ideal ) and the Office for Budget Responsibility (OBR)’s economic forecasts, whilst hardly bullish, weren't the disaster many had anticipated. The bond markets remained calm and businesses can now plan 2026 with more certainty.
Phew…
But there was something jarring about it: if the fiscal picture wasn't as bleak as expected, why did we get so few meaningful measures to address the housing crisis?
The OBR painted a picture that, whilst challenging, offered more headroom than the pre-Budget doom-mongering & leaks suggested. Growth forecasts were revised, the fiscal position stabilised, and the markets didn't revolt. The Chancellor, it seems, had more room for manoeuvre than many anticipated.
So if there was more fiscal space available, why was housing policy essentially absent from this Budget?
- No Help-to-Buy 2.0 to help accelerate housing delivery
- No investment stimulus for Build to Rent or other living sectors.
- No meaningful intervention to address the housing supply crisis that everyone—from the OBR to the Institute of Economic Affairs (IEA), the Resolution Foundation to industry bodies—agrees is one of the fundamental problems facing the UK.
- No mechanism to effect an orderly transition to a professionalised Private Rental Sector.
- No downsizer incentives to increase market mobility and support the senior living sector
- Nothing to tackle secondary asset obsolescence risk across both the commercial and residential sectors
- Nothing to address the yawning supply/demand imbalance in the private rental sector, etc…
No wonder then that the property sector's reaction was one of mild disappointment, with the British Property Federation rightly describing the Budget as a "missed opportunity".
What we did get instead was some tinkering with Council Tax and Business Rates, plus additional targeting of ‘passive income’ from property, saving and dividends:
Business Rates
A comprehensive business rates revaluation from April 2026 was announced, with the retail, hospitality and leisure multipliers also permanently reduced by 5 pence for properties below £500,000 rateable value.
- Over 750,000 shops, pubs, and restaurants are expected to benefit from the lower rates, supported by a £3.2 billion transitional relief scheme over three years.
But as early anecdotal reactions have shown, for many F&B, Hospitality, Leisure and Retail premises, the jump in their rates bill will come as a major shock.
New ‘Passive Income’ taxes
The Budget also introduced measures targeting dividend, property, and savings income as from April 2027, with tax rates rising by 2 percentage points across all bands for these sources of income.
Significantly, the rules for calculating personal income tax liability will be amended to ensure that dividend and property income is treated as the highest part of an individual's income, closing off tax planning opportunities that previously allowed taxpayers to optimize their position across different income bands.
This measure represents a further tightening of taxation on rental income and property investment returns. Combined with the existing restrictions on mortgage interest relief and the higher stamp duty surcharge on additional properties, the cumulative tax burden on buy-to-let landlords continues to rise.
The OBR explicitly warned that these measures "will likely reduce the supply of rental property over the longer run"; a concerning prospect given the acute shortage of affordable rental accommodation and the government's stated ambition to increase housing supply. This is yet another incremental measure that potentially undermines residential investment viability.
HVCTS: a mini-mansion tax
A High Value Council Tax Surcharge (HVCTS) was also introduced on residential properties valued above £2 million. The surcharge will apply:
- a 1% rate on properties between £2-5 million,
- 2% on those between £5-10 million, and
- 4% on properties exceeding £10 million, with the tax levied on the portion of value above each threshold.
While framed politically as a wealth tax targeting ‘mansions’, the cost (and that revenue it will raise) is relatively modest and perhaps functions more as a ‘psychological’ tax – the British Property Federation warning it risks creating "a disincentive to invest in and maintain high-value properties," potentially further dampening activity in prime London and regional markets.
If that does end up being the main result of the HVCTS, then it would be very ‘on brand’ for this Budget. Horace warned us of mountains “labouring to birth a mouse”. For all its fiscal repositioning, redistributive spending and safe headroom, the Government has delivered precisely such an outcome for real estate —significant effort, hype and expectation leading to a disappointingly small result when measured against the scale of the challenges facing us.
So yes, phew — it could have been worse.
