The Two Weeks That Will Be (3rd November 2025)
With the OBR producing its first “post measures” forecast on Monday 10th November, we are now in the fog of war for Budget negotiations. The Chancellor has been told she has to find X and she will now pick a combination of a, b, c, d and e to add up to that number. Given those options will have a knock on effect (and HMT will argue with the OBR over the assumptions that underpin the impact), the OBR will then re-run the model to see if X has been netted off to zero. If not, then Reeves will try a, b, h, j, z… and the process will continue.
In an attempt to optimise the spreadsheet for political as well as economic capital, the Chancellor is now flooding the pitch with “more than one hundred” tax and spending options. Vested interest groups will have the chance to lobby away their fears (see how a banking levy has fallen down the list) whilst each floated kite will then reveal the quantum of its political cost in terms of public opinion. If option c yields more revenues on fewer assumptions and polls better with a core constituency or interest group than option b, then c moves closer to the efficient frontier.
This is why it’s true when the Treasury says no decision has yet been taken and that Reeves herself doesn’t know what will be in the Budget. She hasn’t had the argument with the OBR yet.
Except this time round, the argument isn’t only with the OBR. It is also with Number 10, where the PM now has his own economists running the numbers; with Labour MPs, who dispute economists if it doesn’t suit their politics; and with the public, who are becoming ever more fed up with the interminable gloom.
The one group that appear to be happier are the markets, who feel reassured that, come what may, X will be found and the fiscal rules will be met. Sure, such reassurance will end up with measures that both dissuade capital from entering the country and harm the consumer, but, so the thesis goes, Gilts rise in a disinflationary recession so a Trussian repeat will be avoided on Budget day.
It is in the days afterwards that the markets will have to contend with a serious risk: the departure of Starmer and Reeves and a lurch to the left under the next prime minister. Due to a change in the Labour rulebook this year, there can now be a challenge to the leader of the Labour Party at any time if 20% of MPs propose an alternative. Previously, this could only happen at party conference. See below for the new section of the 2025 rulebook, Clause 2.2.B.ii, versus the previous version in 2024:
The rulebook goes on to outline a scenario where the Leader could become “permanently unavailable” and ‘the Cabinet shall, in consultation with the NEC, appoint one of its members to serve as Party leader until a ballot under these rules can be carried out’. It also refers to the same scenario when in opposition, noting the Deputy Leader “shall automatically become Party Leader on a pro-tem basis” until the ballot is carried out. In short, all roads lead to the newly elected Deputy Leader, fresh from a mandate from Labour members, the one and only Lucy Powell. At any point she can say that 81 MPs have written to her and asked for a change of direction from Starmer. This doesn’t mean there is a challenge; only the threat of one. If the PM ploughs on regardless, she can make it official, becoming the stalking horse to open up the field to alternative candidates. She might even win. At any stage, Starmer could choose to resign rather than face a bruising contest which would crystallise in numbers the opposition to his rule.
Starmer’s enemies therefore now have means and motive. The Budget provides the opportunity. Just because the Chancellor stands up to make a budget speech does not necessarily mean all of its measures immediately become law. Should it turn out, as the Budget seeps into public consciousness, that a pasty or dementia tax is lurking, or that the public really don’t like the first rise in the basic rate of income tax for fifty years, then MPs can vote down the offending measure. As the Institute for Government points out, “budget resolutions are usually debated by the Commons for four days and must be passed within 10 sitting days of the budget”. That would give potential rebels until Monday 15th December 2025 to push back on a tax change. A second reading on the Finance Bill must take place within 30 days of the passage of the budget resolutions, meaning a second window of opportunity would run until 14th January 2026.
Voting down a specific measure does not necessarily mean the government would fall. Although Budget votes are matters of confidence, changing one element need not be fatal. This happened in 1994. In the 29th November Budget, Chancellor Ken Clarke proposed to raise VAT on fuel so that it matched the full 17.5% VAT rate. On 6th December, the vote was defeated 319-311 and on 8th December Clarke came back with an emergency statement proposing alternatives such as raising excise duty.
At that time John Major’s government had lost its majority, having withdrawn the whip from 8 MPs over their failure to back increased subsidies to the EU. The Labour Party currently hold a massive majority but they have fallen in opinion polls by as many points from their election win as Major’s government had by the end of 1994. And now there are a plethora of other choices where disenchanted Labour voters can find a home.
Waiting until yet another reminder of this reality at the May local elections would be too late to staunch the bleeding. Far better to act early and often. A rebellion over a budget measure would allow MPs to demonstrate their concerns over a point of principle. Market volatility would be grist to the mill, demanding a speedy response from a prime minister not known for his quick decision-making (unless it is over rental infractions by his chancellor).
Ahead of the potential for increased political risk after the budget, the Bank of England are likely to cut interest rates this Thursday. Better for them to get ahead of the curve and not be caught up in the crossfire. They are not supposed to act on fiscal measures until they become reality, so Budget speculation wouldn’t be enough to get them over the line. They can however argue that it is quite clear that tax rises are coming, just as inflation, particularly wage inflation, is becoming more benign. It will be a 5-4 vote however given not every MPC member is on board with this view of the world. For the first time we will see their individual rationale, as the Minutes will now award a paragraph to each member to set out their thinking. Lombardelli speaks on Monday 10th November, Greene on Tuesday 11th November. There is also a speech from Lee Foulger, BOE Director of Financial Stability, Strategy and Risk, on Wednesday 12th November with the intriguingly timely title of “Enhancing the resilience of the gilt repo market” at the annual Association of Financial Markets’ European government bond conference. UK Q3 GDP will be released on Thursday 13th November.
Whilst the US remains in a data desert the focus will continue to be on verifiable information elsewhere. Specifically, on earnings season. We will get an update on the consumer with McDonalds and DoorDash reporting Wednesday and Disney on Thursday 13th November. Fed Dove-Cheerleader-in-Chief Stephen Miran speaks on Friday although the direction of the Fed can best be characterised as chaotic given the FOMC are gripped in the paroxysms of how to deal with a changing of the guard. Treasury Secretary Bessent continues apace with his rigorous interview process for the next Fed Chair, even as it still remains a distinct possibility that Trump will choose to appoint him in the role. Bessent has been upping his social media game and gaining plaudits from Republicans for doing so – Trump might need to keep a lid on such attention. Or, he could just overrule Bessent’s choice for Chair – of the shortlist, Trump will prefer Kevin Warsh for the familial loyalty links (Warsh’s wife is daughter of one of Trump’s BFFs).
But the Fed are the least interesting game in town. Trump’s trade truce with China and the ongoing circular AI/MAG7 investments have managed to keep a lid on the VIX index and power the S&P500 back to record highs.
