We think the Chancellor will raise taxes in line with the planned £16bn (0.6% of GDP) a year increase in public spending at the Budget on 30th October. The main influence of this will just be a rotation in the shape of GDP growth away from consumer spending and towards government consumption. But an increase in public investment at the Budget, perhaps by around £18bn, may boost the level of GDP by 0.4% in 2025/26. We still think the Bank of England will reduce interest rates from 5.00% now to 3.00% in early 2026, rather than to 3.75% as anticipated by investors. But if the Chancellor were to raise investment by more than we expect, rates may not fall quite as fast.
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