Benjamin Caswell, Senior Economist, NIESR
David Bharier, Head of Research, British Chambers of Commerce
With the Autumn Budget set for 26 November, the Chancellor faces some of the toughest fiscal decisions in recent memory. For businesses, these choices matter: the framework of fiscal rules, the outlook for public finances, and the policy mix adopted in the Budget will all shape the environment for investment, borrowing, and growth. This blog outlines the basic choices facing the government and their implications for the wider economy.
The upcoming Budget puts the UK economy at a critical juncture and could make or break business confidence. The British Chambers of Commerce’s Quarterly Economic Survey of 4,600 businesses – mostly SMEs – has shown that since the previous Budget, sentiment has fallen to 2022 levels and not recovered. In Q3, only 48% expected turnover to grow in the next twelve months, compared with 58% at the start of 2024.[1]
Taxation has grown to be the top issue, cited by 59% of businesses, followed by inflation at 57%. The two factors are interlinked. Last year’s surprise employer NICs increase triggered the initial fall in confidence, driving up prices. Confidence has since remained subdued, reflecting expectations of further tax rises, despite the Chancellor’s assurances that last year’s tough Budget was a one-off.
For SMEs, this uncertainty is constraining investment and dampening growth expectations. Businesses are also expressing deep frustration at policy making – 79% do not feel the impact of new policies is being properly assessed and 77% do not think policy change is moving at the right pace.[2] Policy churn has been a longstanding issue at the heart of UK policymaking.
The Chancellor’s Fiscal “Trilemma”
The central political and economic challenge for the Chancellor is a fiscal “trilemma.” The government has promised to stick to its fiscal rules, protect spending on essential services, and avoid tax increases for working households. In practice, it cannot do all three. At least one pledge must give way.
For businesses, this matters because the route chosen will directly influence the policy landscape. More austerity-like spending cuts could weaken demand and undermine already strained public services; higher taxes could raise the cost of labour or reduce household disposable incomes; and relaxing the fiscal rules risks unsettling markets, increasing borrowing costs for both government and business.
How Fiscal Rules Shape Policy Choices
The UK’s fiscal policy is framed by three self-imposed rules:
- The stability rule, requiring the day-to-day budget to be in balance or surplus by 2029/30.
- The debt rule, requiring public sector net financial liabilities (PSNFL) to fall as a share of GDP by the same date.
- The welfare cap, fixing total annual welfare spending at £194.5bn this parliament.
These rules aim to reassure bond markets that the government is managing debt responsibly, which in turn helps to keep borrowing costs stable.
Weak Public Finances, Sluggish Growth
The rules matter all the more because of the fragile fiscal and economic context. UK productivity growth has been disappointing since the global financial crisis, and GDP growth is forecast to remain sluggish: NIESR projects just 1.2% a year over the next five years, compared with the OBR’s 1.7%. The result is a smaller “economic pie” from which to fund public spending.
At the same time, the Chancellor’s fiscal headroom has largely disappeared. What was a £9.9bn buffer at the Spring Statement has been eroded by weaker growth, higher spending, and policy reversals. Public Sector Net Debt is now at its highest in sixty years, while the tax burden is at a seventy-year high. Inflation, though easing, is expected to average 3.4% over the next six months, reducing household purchasing power and putting additional pressure on the public finances. Against this backdrop, NIESR forecasts a current budget deficit of over £38bn by 2029/30.
Why Borrowing More Isn’t Always the Answer
One option would be to loosen the fiscal rules and rely on additional borrowing. But the experience of the September 2022 “Mini-Budget” is a stark warning: if markets doubt the government’s commitment to fiscal discipline, borrowing costs can spike suddenly. That episode saw gilt yields surge, mortgage rates rise, and business financing conditions tighten almost overnight.
For this reason, increasing borrowing is widely viewed as politically and economically unviable. Businesses need stability in credit markets, not a repeat of the volatility that followed in 2022. Preserving credibility, even at the cost of politically difficult choices, is therefore essential.
Tax Rises vs. Spending Cuts: The Difficult Options Ahead
This leaves the Chancellor with two unpalatable options.
- Spending cuts are politically and socially difficult. Defence, the green transition, and public infrastructure all require higher spending, not less. Meanwhile, frontline services such as health, social care, and local government are already under intense strain. Deep cuts would be visible to voters and damaging to economic potential.
- Tax rises contradict the government’s manifesto pledges but may prove a more practical route. In practice, this may mean a mix of reform and gradual increases across the tax base. Raising corporation tax or employers’ National Insurance would hit businesses directly, while higher income or consumption taxes would squeeze household demand. But without a long-term plan to generate revenue, the government risks continuous ad hoc adjustments – eroding both market and business confidence.
The Case for Fiscal Honesty
The overriding need is for fiscal honesty. Pretending that all three goals – meeting the fiscal rules, protecting spending, and avoiding tax rises – can be achieved simultaneously only postpones the hard choices and increases the eventual cost. The perpetual cycle of kite-flying and speculation itself has been damaging for investment. A credible path forward will involve a combination of tax increases and spending cuts in order to put public finances on a sustainable footing.
Fundamentally, the UK economy needs growth to overcome the trilemma, and this will only happen if businesses are enabled to invest in productivity and increase exports. In the meantime, businesses need to prepare for all scenarios ahead of the Budget, monitor how investment commitments are handled, and recognise that fiscal credibility is not an abstract concern. It underpins borrowing costs, investor confidence, and the long-term stability of the UK economy.
Bottom Line for Business
The Autumn Budget will not just be an exercise in balancing the books. It will set the tone for the UK’s economic trajectory, influence the environment for corporate planning, and shape household demand for years to come. It could also significantly impact the political climate. BCC business sentiment data consistently show that businesses are exposed to big fiscal decisions, and this has historically been to the downside. Tax anxiety is now the overarching concern for SMEs. Understanding the Chancellor’s fiscal crossroads could help businesses anticipate challenges and plan strategically to reduce their exposure to surprise announcements.
Join the conversation
NIESR: Organisational and Individual memberships: https://niesr.ac.uk/why-become-a-member
BCC Insights Unit publications https://www.britishchambers.org.uk/insights-unit/publications-and-commentary/
About NIESR:
Founded in 1938 by a group of major social and economic reformers, including John Maynard Keynes and William Beveridge, The National Institute of Economic and Social Research (NIESR) is Britain’s longest established independent research institute. Operating as a charity, independent of all party-political interests, its mission is to carry out research to understand the economic and social issues that most affect people’s lives and to propose better policy responses. In doing this it works with policymakers, academics and the media, and receives no core-funding from government or other sources.
[1] https://www.britishchambers.org.uk/news/2025/10/bruised-firms-not-ready-for-another-budget-battering/
[2] https://www.britishchambers.org.uk/news/2025/07/mps-urged-to-back-key-erb-amendments/