Budget 2026: Five Things To Watch

Last week, OakNorth and Boardwave welcomed a group of Boardwave members for a timely discussion with former Chancellor of the Exchequer under the Theresa May Government, Lord Philip Hammond. Held two weeks before the current Chancellor Rachel Reeves’ Budget on 26 November, the session offered a clear-sighted view of the global, economic, and political forces shaping the choices ahead. Hammond provided an inside perspective on the realities shaping the UK’s economic future, and thought processes that will be influencing the Chancellor’s decisions.

Here are the five key takeaways.

1. Global instability now defines the economic backdrop

The world in which the UK operates is more volatile than at any time since the Cold War. Longstanding assumptions – especially about US leadership – no longer hold. The United States, once the guarantor of the international economic and security framework, is now more inward-looking and less predictable. An economy like the UK’s, heavily exposed to global trade flows, is particularly vulnerable when the global anchor becomes unstable.

Demography compounds the challenge. The UK’s ageing population means higher demand for public services and a smaller tax base to fund them. 

Technology adds another layer. AI and automation are moving beyond low-skilled roles and into professions once assumed to be insulated. Robotics and quantum computing will reshape entire categories of high-value work, from surgery to the actuarial profession. This will not only disrupt the labour market, but also wider social structures.

2. The fiscal outlook is tight, and up to £40 billion may be required

The UK’s public finances leave little room for manoeuvre. Productivity growth – once 2 per cent a year – has barely shifted since the 2008 financial crisis. Real GDP per capita has been essentially stagnant for more than a decade. This is why Hammond believes living standards feel frozen, and why political discontent and populism have grown.

This sluggish performance feeds directly into the Exchequer. Debt interest costs reached roughly £105 billion last year. At the last Budget, the Chancellor left herself just under £10 billion of fiscal headroom to deal with unforeseen challenges - a rounding error in comparison to the £3 trillion overall size of the economy. As a result, any downgrade in growth or uptick in borrowing costs forces the Chancellor to either raise taxes or cut spending to stay within her fiscal rules. 

Lord Hammond observed that in his day as Chancellor, he left himself around £30 billion headroom within a much smaller economy. He believes headroom needs to be closer to £35 billion today to be credible, implying that the Budget will need to contain around £40 billion of savings or revenue-raising measures. 

3. Welfare spending is accelerating and risks overwhelming the system

One of the sharpest pressures comes from welfare. Since the pandemic, one million additional people have moved onto the main out-of-work benefit, Universal Credit, and around 800,000 onto Personal Independence Payments for disability. Much of this growth is driven not by physical disability but by conditions such as anxiety and depression, Hammond said.

Disability-related payments now cost approximately £65 billion a year, and expenditure is rising quickly. The economic impact is severe: lower labour market participation, weaker productivity, and a heavier tax burden on those still in work.

In Hammond’s view, a functioning welfare system must support those who cannot work, yet it must also help those who can return to the labour market. Without a radical shift in policy, the fiscal challenge grows steeper. With welfare reform appearing to be politically ringfenced, after the government’s failure to implement modest savings earlier this year due to the opposition of Labour MPs, the only remaining levers are tax rises or spending cuts elsewhere, neither of which supports growth.

4. A pro-growth strategy is essential — and long overdue

Hammond urged that growth must become the central organising principle and goal of the government. For too long, the UK has treated growth as an aspiration rather than an instruction. Planning reform has been piecemeal. Electricity grid constraints have blocked billions of pounds in potential investment. Industrial energy costs have risen to levels that undermine competitiveness, especially compared with the United States and parts of Europe.

The country needs a more deliberate economic strategy. For example, unlocking grid capacity between Heathrow and Bristol would enable £5–10 billion of data centre investment almost immediately, he claimed. Germany, recognising the strategic importance of industrial competitiveness, consciously loads more energy costs onto consumers so industry pays less. The UK has yet to make comparable choices.

Incrementalism will not break the cycle of low growth. Faster infrastructure delivery, a more competitive energy environment, and a regulatory system that supports investment are essential. A government unwilling to prioritise growth above competing pressures will struggle to shift the dial.

5. Politics is volatile, and leadership will determine whether the UK moves forward

The political landscape into which Rachel Reeves will deliver the Budget is unusually febrile. After more than a decade of stagnant living standards, voters are impatient and populist movements have gained traction. Simple narratives gain strength when economic realities feel complex and unyielding.

Labour’s large majority creates its own tensions. A significant number of MPs did not expect to be in Parliament and may not plan long careers. That shortens political horizons and can make long-term reform harder to deliver. Yet long-term reform is exactly what the country now requires.

Leadership will determine whether the UK confronts its structural challenges or continues to drift. A government willing to take difficult decisions, prioritise growth and explain the trade-offs clearly can rebuild confidence, Hammond said. One that avoids these choices will find its fiscal and political room for manoeuvre shrinking quickly.