Business
Pre-Budget jitters blamed for surprise contraction in economy
Chancellor Rachel Reeves has come under further pressure as pre-Budget worries and tax hike speculation was widely blamed for an unexpected contraction in the economy during October.
Official figures showed the UK economy shrank for the second month running in October, contracting by 0.1% following a 0.1% decline in September.
Most economists had been expecting a rise of 0.1% for October on hopes of a manufacturing bounceback led by Jaguar Land Rover’s (JLR) recovery from a major cyber attack.
The Office for National Statistics (ONS) said gross domestic product (GDP) fell as car manufacturing activity only made a “slight” recovery from the woes at JLR, with the services sector weighed down as consumers held back spending on the high street before the Budget, delivered on November 26.
The data shows the UK economy has now not grown since June, with GDP either flat or falling in the past four months.
Economists said the weaker-than-expected figures would reinforce hopes of an interest rate cut by the Bank of England next week in what would be a welcome pre-Christmas boost to households.
In the three months to October, the economy shrank by 0.1% after growth of 0.1% in the three months to September, according to the ONS.
Many businesses have recently indicated that activity in the economy slowed in the lead-up to the Budget as speculation over possible tax measures grew.
Barret Kupelian, chief economist at PwC, said: “Some of this weakness still reflects the cyberattack on Jaguar Land Rover, which knocked car output earlier in the autumn, but the bigger story is that speculation around the autumn Budget kept households and businesses in wait-and-see mode.
“Given the timing of the Budget, November’s GDP print is likely to look similarly subdued before any post-Budget effects start to show up.”
Some experts have said weak recent growth was largely driven by rampant speculation in the run up to the Budget.
Former Bank of England chief economist Andy Haldane said last month the prolonged worries over the Budget and leaks over possible tax hikes had “caused businesses and consumers to hunker down”.
Earlier this week, Ms Reeves hit out at “too many leaks” in the run-up to Budget when questioned by a committee of MPs.
Shadow chancellor Sir Mel Stride said the latest GDP blow was “a direct result of Labour’s economic mismanagement”.
He said: “For months, Rachel Reeves has misled the British public. She said she wouldn’t raise taxes on working people – she broke that promise again. She insisted there was a black hole in the public finances – but there wasn’t.”
The ONS data The data revealed that month-on-month activity in car production jumped 9.5% higher in October, but this was only a partial recovery from the 28.6% plunge in September as the JLR cyberattack sent shockwaves through the sector.
Car production activity remained 21.8% lower than in August.
JLR was forced to pause production of its cars for more than a month after being targeted by hackers, having a knock-on impact for the wider sector and resulting in a costly recovery.
It gradually resumed production through October.
Widespread pressure in the rest of the economy also weighed on the GDP outturn, with output down 0.3% across the dominant services sector – including a 1.1% drop for retail – and a 0.6% fall across construction.
A Treasury spokesperson said: “We are determined to defy the forecasts on growth and create good jobs, so everyone is better off, while also helping us invest in better public services.”
Rob Wood, chief UK economist at Pantheon Macroeconomics, said the recent “Budget chaos” through November is likely to hit growth through that month too, which could see GDP contract by 0.1% in the final quarter of 2026.
He said: “Weak GDP adds to the reasons for the Monetary Policy Committee to cut interest rates next week.
“Rate setters would need a huge surprise in inflation and the labour market data published next week to stop a hike.”
Interest rates are widely expected to remain at 3.75% as Bank of England policymakers prioritise curbing above-target inflation while also monitoring economic growth, according to expert analysis.
The Bank’s Monetary Policy Committee (MPC) is anticipated to leave borrowing costs unchanged when it announces its latest decision on Thursday, marking its first interest rate setting meeting of the year.
This follows a rate cut delivered before Christmas, which was the fourth such reduction.
At the time, Governor Andrew Bailey noted that the UK had “passed the recent peak in inflation and it has continued to fall”, enabling the MPC to ease borrowing costs. However, he cautioned that any further cuts would be a “closer call”.
Since that decision, official data has revealed that inflation unexpectedly rebounded in December, rising for the first time in five months.
The Consumer Prices Index (CPI) inflation rate reached 3.4% for the month, an increase from 3.2% in November, with factors such as tobacco duties and airfares contributing to the upward pressure on prices.
Economists suggest this inflation uptick is likely to reinforce the MPC’s inclination to keep rates steady this month.
Philip Shaw, an analyst for Investec, stated: “The principal reason to hold off from easing again is that at 3.4% in December, inflation remains well above the 2% target.”
He added: “But with the stance of policy less restrictive than previously, there are greater risks that further easing is unwarranted.”
Shaw also highlighted other data points the MPC would consider, including gross domestic product (GDP), which saw a return to growth of 0.3% in November – a potentially encouraging sign for policymakers.
Matt Swannell, chief economic advisor to the EY ITEM Club, affirmed: “Keeping bank rate unchanged at 3.75% at next week’s meeting looks a near-certainty.”
He noted that while some MPC members who favoured a cut in December still have concerns about persistent wage growth and inflation, recent data has not been compelling enough to prompt back-to-back reductions.
Edward Allenby, senior economic advisor at Oxford Economics, forecasts the next rate cut to occur in April.
He explained: “The MPC will continue to face a delicate balancing act between supporting growth and preventing inflation from becoming entrenched, with forthcoming data on pay settlements likely to play a decisive role in shaping the next policy move.”
The Bank’s policymakers have consistently voiced concerns regarding the pace of wage increases in the UK, which can fuel overall inflation.
India’s budget focuses on infrastructure and defence spending and tax breaks for data-centre investments.
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New Income Tax Act 2025 to come into effect from April 1, key reliefs announced in Budget 2026
New Delhi: Finance Minister Nirmala Sitharaman on Sunday said that the Income Tax Act 2025 will come into effect from April 1, 2026, and the I-T forms have been redesigned such that ordinary citizens can comply without difficulty for ease of living.
The new measures include exemption on insurance interest awards, nil deduction certificates for small taxpayers, and extension of the ITR filing deadline for non-audit cases to August 31.
Individuals with ITR 1 and ITR 2 will continue to file I-T returns till July 31.
“In July 2024, I announced a comprehensive review of the Income Tax Act 1961. This was completed in record time, and the Income Tax Act 2025 will come into effect from April 1, 2026. The forms have been redesigned such that ordinary citizens can comply without difficulty, for) ease of living,” she said while presenting the Budget 2026-27
In a move that directly eases cash-flow pressure on individuals making overseas payments, the Union Budget announced lower tax collection at source across key categories.
“I propose to reduce the TCS rate on the sale of overseas tour programme packages from the current 5 per cent and 20 per cent to 2 per cent without any stipulation of amount. I propose to reduce the TCS rate for pursuing education and for medical purposes from 5 per cent to 2 per cent,” said Sitharaman.
She clarified withholding on services, adding that “supply of manpower services is proposed to be specifically brought within the ambit of payment contractors for the purpose of TDS to avoid ambiguity”.
“Thus, TDS on these services will be at the rate of either 1 per cent or 2 per cent only,” she mentioned during her Budget speech.
The Budget also proposes a tax holiday for foreign cloud companies using data centres in India till 2047.
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