December 2025
Market Commentary
‘Buy Now, Pay Later’ — Budget 2025
(3 min read)
3rd December 2025
A conventional, tax-raising budget offered limited ambition for growth. Market reaction was muted, while compelling UK equity valuations reinforce long-term opportunities despite a sluggish economic backdrop.
After months of speculation, filling the vacuum with an array of possible tax and spending measures, in the end it was a conventional or traditional Labour party budget: public spending increased, funded by higher taxes even though the OBR surprised everyone with a more optimistic fiscal position.
There were increases in welfare spending, the fiscal headroom was lifted from about £4bn to £22bn resulting in a rise in the overall tax take from 35% of GDP to 38% and now more in line with major European economies (see the table below showing G7 Tax Revenues in 2023). This is important as for years the higher tax take in Europe has led to sclerotic economic growth particularly when compared to the US. This increase in taxation has been funded by freezing income tax thresholds and by other measures which do not take effect until later in the parliament.
As one commentator put it a ‘buy now, pay later’ fiscal strategy could come home to haunt the government nearer the next election.
Total Tax Revenue for G7 Countries
Source: Office for Budget Responsibility, 2023
Macro
The macro-economic forecasts were unremarkable with growth slightly better than the previous estimate for this year and then remaining at an anaemic 1.5% for the remainder of the forecast period. Government borrowing is expected to fall as a share of GDP in every year out to 2030/31, and the rate inflation falls by 0.45% over the next 12 months.
Bonds
The gilt market took all of this in its stride as bond markets are only concerned about the government’s creditworthiness and are unmoved as to whether the books balance with the size of government at 0% or 100% of GDP. This budget was conspicuous with its lack of a plan for economic growth. Since being elected, the government has been very vocal about the importance of growth to fund the public sector. All in all, it feels as though we had to wait for quite a long time for a rather uninspiring event.
UK
The outlook for UK markets because of last week’s budget is overall neutral. The lead up was the most damaging aspect. An increase in taxation is a headwind for consumption, investment, and overall economic growth and therefore broadly positive for UK gilts and negative for sterling against a backdrop of further interest rate cuts as inflation also begins to fade. For the UK equity market there are no new significant drivers either positive or negative except that there is a sense of relief which reduces any excuses for consumers and businesses to proceed with making decisions.
What does this mean for client portfolios?
For client portfolios there was nothing in the budget to suggest we change our overweight position to the UK equity market. Valuations remain cheap relative to other markets and the UK economy, while likely to remain sluggish in absolute terms, is likely to perform well against G7 peers and be supported by lower interest rates as the inflation outlook improves.
If the market fails to rerate over time M&A activity will continue to support investment performance.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
Further Reading (05/11/25)
Read our recent article ‘Diversification Delivers’ from November which interrogates what has driven our portfolio’s returns in 2025.
Learn More
View our latest Factsheets and performance results for our Montgomery Portfolio Service on our Investor Information page.
Glossary
Succinct definitions of financial terms on our Glossary page.
Risk warning
This article and other articles on www.MontgomeryAssociates.co.uk does not constitute an offer or invitation in respect of investments described, nor should it be interpreted as advice or a recommendation. You should contact your financial adviser or accountant for advice relating to your circumstances. The opinions and information in this article have been prepared from sources believed to be reliable at the time and are given in good faith. The information and opinions expressed in this document represent our views at the time of preparation and may be subject to change. The value of an investment and any income from it can fall as well as rise and you may not get back the amount you originally invested.
Past performance is not a guide to future performance.
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