UK FISCAL: 'Red' Labour Budget Ensures Comprehensive Backbench Support

Newspaper headlines surrounding yesterday's Budget announcement are broadly as would be expected. The right-wing press lambasts Chancellor of the Exchequer Rachel Reeves for a 'tax-and-spend' budget that rewards those on benefits at the expense of those working. The left-wing press praises Reeves for a true 'Labour' budget that makes the wealthy pay more to support those with less. The financial press raises questions about how the sizeable tax rises will impact on the UK growth outlook and note the easier path to rate cuts for the BoE.  

• The most important political reaction in the short term is not in the press, or from the public, but within the parliamentary Labour Party. For the past several months, and especially in the chaotic run-up to the budget statement, there had been significant speculation that Reeves' (and indeed Starmer's) position was under immediate threat.
• However, the removal of the two-child benefit cap and the introduction of the High Value Council Tax Surcharge (so-called 'mansion tax') resulted in loud cheers from the Labour benches in the House of Commons and a very positive reception from Labour MPs.
• Political predictions market Polymarket shows the implied probability of Reeves being removed from office by year end falling from 16% on the evening before the budget to just 5% at present. 

Chart 1. Political Predictions Market, 'Rachel Reeves out as Chancellor by 31 Dec 2025?', %

Source: Polymarket

• Any market concerns that the gov't would not be able to pass the budget (despite its sizeable majority) have been thoroughly dispelled.
• Reeves and Starmer are not necessarily comfortable in their positions, though. The reaction to the budget in opinion polling in the days and weeks ahead will be closely watched, while the local/devolved parliamentary elections in May 2026 will be the next major inflection point for both the PM and chancellor.