Goldman Sachs: The UK Budget

The Chancellor’s fiscal headroom is expected to fall from £24bn to around £15—16bn before next week’s Autumn Budget, as higher borrowing costs and weaker growth forecasts outweigh some improvement in wage projections. Economists expect a relatively low-key package, with around £5bn of tax increases alongside further cost-of-living support, modest departmental spending adjustments to help fund defence and additional investment. Potential revenue measures include anti-avoidance initiatives, extending the National Insurance base and increasing the bank surcharge. A higher bank surcharge would weigh on UK lenders’ profits. Each 1 percentage-point increase is estimated to reduce 2028 net profit forecasts by around 0.5% for Barclays and just over 1% for Lloyds and NatWest. Returning the surcharge to its former 8% rate from 3% could therefore create a 2—3% headwind for Barclays and 6—7% for Lloyds and NatWest, although the previous higher rate applied when corporation tax was lower. UK banks already trade at a discount to European peers despite stronger returns on equity, which analysts attribute largely to a higher UK-specific risk premium. A post-Budget re-rating would depend on improve