Budget 2025 Credit Risk

Everyone has already heard that real GDP grows by 1.5 per cent next year, inflation heads back towards target and the Chancellor has “restored stability”. That is the performance. The real Budget lies in the OBR tables and the fine print of Treasury policy decisions. That is where you find the credit story: the capital structure of the country, the direction of profit margins, and the extent to which the state is inserting itself ahead of other creditors.

Macro regime: slow grind, weak margins, high carry

The OBR’s central case is not a crisis. It is a grind. Real GDP ticks along at around one and a half per cent a year, but the productivity engine beneath it has been marked down again. Real household disposable income per head jumps in the near term as energy effects unwind, then slows to a crawl, to roughly a quarter of a per cent a year on average over the rest of the forecast, far below the 1 per cent norm of the 2010s. Rates ease a little but settle in a world where ten year gilts sit close to six per cent and UK funding costs are among the highest in the G7.

That mix matters because it changes who captures the growth. The OBR expects labour income to grow faster than corporate profits over the forecast period. Cumulative labour income growth is revised up relative to March; cumulative profit growth is revised down by around six percentage points. The profit share of GDP sits at around 15.8 per cent in the mid 2020s and only edges up to about 16.1 per cent by 2030-31, still below its pre pandemic norm. Because labour income is taxed more heavily than profits, this composition shift also raises the tax take per pound of growth.

The growth that shows up in the headline therefore does not turn into thick buffers for creditors. It flows first into wages and then into tax receipts, with only a thin slice left for retained earnings. In the 2010s, cheap money allowed even modest growth to heal balance sheets. This regime does not. For highly leveraged sectors the problem is straightforward: interest costs remain structurally higher, refinancing risk is real, and wage growth around five per cent compresses margins. Where pricing power is limited, counterparties will try to bridge the gap through their suppliers.

The fiscal state: bigger, heavier, more intrusive

The Budget cements a permanently larger state. Tax-to-GDP climbs to just over 38 per cent by 2030-31, roughly five percentage points above pre pandemic levels. Spending settles around 44 to 45 per cent of GDP, also about five points higher than before Covid. For creditors, the critical questions are who pays for that and how much room for error is left.

By 2029-30 the Budget’s tax measures raise about £26.1 billion. Roughly £14.9 billion of that is personal tax. Three relatively quiet decisions drive most of the yield: freezing income tax and NICs thresholds, charging NICs on salary sacrifice pensions, and pushing up rates on property and investment income. Together they generate close to 60 per cent of the extra tax take. The headline grabbing measures look noisy but move much less money.

On the spending side the story is similar. The package of reversals and reforms on welfare costs around £9.3 billion a year by 2029-30, swallowing about 40 per cent of the current budget headroom on its own. After this Budget the remaining headroom against the fiscal rule is £22 billion, about 0.6 per cent of GDP.

That might sound manageable if you ignore history. The OBR’s average four year ahead borrowing error is around £21 billion; the median is roughly £54 billion. In other words, the entire margin is about one forecast miss wide. The welfare cap margin sits at under £2 billion, while a plausible disability and health caseload scenario adds roughly £11 billion to spending. There is very little slack if anything breaks in the wrong direction.

A one percentage point rise in rates and gilt yields knocks around £16 billion off the current balance in 2029-30. The OBR’s own downside receipts scenario shows that weaker earnings and other tax base shocks together could leave receipts around £40 billion lower by 2030-31; within that, the earnings contribution alone is on the order of the current budget headroom. Overlay those with welfare or local government shocks and the headroom disappears quickly. When that happens, the adjustment comes from some combination of more tax, more borrowing and deeper spending restraint. Markets and politics constrain the last two. That leaves a tougher tax and compliance regime pressing on the same private cash flows that trade creditors rely on.

The creditor state: HMRC and local authorities move up the queue

The enforcement story is spelled out in the documents. Across the Budget report, the OBR EFO and the Budget speech, references to HMRC, tax debts, enforcement, fraud, arrears and debt collection are concentrated where the money is. The state is not just bigger; it is acting more like a senior creditor.

The OBR highlights a package of tax administration, compliance and debt management measures expected to raise around £2.3 billion a year by 2029-30. That money comes from targeting older tax debts, hiring more HMRC debt managers and using transactional risking algorithms on VAT and corporation tax returns. The Budget also sets a timetable for mandatory electronic VAT invoicing by 2029 and increases penalties for late corporation tax filing.

That combination gives HMRC faster data and sharper sticks. Stretching tax payments becomes harder to hide and easier to punish. For trade creditors this matters directly: once HMRC is in the picture, it will move earlier and more aggressively than most commercial creditors can. If a customer owes HMRC and owes you, the state will be at the front of the queue more often.

Local authorities are the second pressure point. Between 2022-23 and 2024-25, net local authority borrowing has been revised up from about £32 billion to roughly £43 billion. SEND related Dedicated Schools Grant deficits are forecast to reach around £4.9 billion by 2027-28 and roughly £14 billion by the end of the statutory override, equivalent to nearly two thirds of councils’ liquid assets. On any corporate balance sheet those numbers would be treated as a developing solvency problem.

Accounting rules and statutory overrides keep much of this off the usual solvency radar for now. Once the override expires, councils either receive further central support or are forced into deep adjustments on spending, charges and supplier terms. The Budget assumes some SEND cost is absorbed centrally from 2028-29, but the funding path is far from clear.

In practice that means tighter budgets, slower payment for non statutory services and more use of contractual levers to push risk down the chain. It also increases pressure to raise revenue locally through council tax, fees and charges. For creditors, public sector no longer automatically equals safe. Central government behaves more like a disciplined senior creditor; local authorities increasingly look like stressed borrowers with political constraints.

Who really gains from the distributional story

On paper this is a fairness Budget. Treasury distributional charts show income deciles one to nine as net winners in 2028-29, as a share of income, once tax, welfare and public service decisions since Autumn 2024 are combined. Only the top decile loses overall.

Overlay the OBR’s path for real household disposable income and the picture looks less generous. RHDI per head rises by just over three per cent in 2024-25, then slows sharply, to roughly a quarter of a per cent a year on average over the rest of the forecast. At the same time the effective tax rate on labour income drifts towards about 40 per cent by the end of the decade, largely because of the threshold freeze.

Lower income households clearly gain relative to where they would have been; that supports spending on essentials. The middle of the distribution gains slightly on paper but in an environment of anaemic real growth and rising tax. The upper middle and top see a heavier tax burden with little welfare offset. Credit risk is driven by that interaction, not by the headline decile chart.

• Value end FMCG and grocers benefit from the uplift at the bottom, which underpins basic volumes.
• Discretionary non food retail, leisure and mid market lifestyle face a thinner, more cautious customer in deciles six to nine.
• Premium discretionary and property linked services lean on households facing higher tax on investment and property income and, in many areas, higher top band council tax.

A portfolio skewed towards discounters and essentials is exposed to a different Budget than one built on fee based wealth, private education and high end leisure. That should show up in sector appetite, concentration limits and scenario design.

Sector risk: where failure and late payment are most likely

Combining the macro forecast, the fiscal stance and observed payment behaviour produces a clear sector pattern. The risk is not evenly spread. Certain sectors are structurally more exposed to this high tax, high rate, low growth regime and to a tougher creditor state.

Four sectors sit clearly in the danger zone for failures and late payment: construction; real estate and leveraged landlords; consumer goods wholesale and distribution; and logistics and transport. They combine weak demand, rising input costs, heavy working capital needs and, in some cases, direct policy risk.

Behaviour at the top of these chains matters. Large grocers can normalise 60 to 90 day terms and run lean inventory. Main contractors can fund themselves off subcontractors through retentions and delayed certification. Local authorities can extend payment times for non statutory services. Central government outsourcers can intensify the use of change controls and disputes. In a world of thin margins and high rates, those behaviours are rational for them and dangerous for you.

By contrast, core insurers, big pharma and major network operators sit in relatively safer territory at the macro level. They are not risk free; the weak points are often at the edges: MGAs and small brokers, care homes and community providers reliant on squeezed local authority or NHS budgets, and resellers or MSPs wedged between large telcos and stressed B2B customers. Policies need to reflect that nuance rather than treating whole sectors as homogenous.

What next for trade-credit and risk leaders?

The big picture is straightforward. The Budget has moved the operating baseline. If your credit framework has not moved with it, you are under pricing risk and over trusting balance sheets that will not repair themselves.

Reset macro assumptions in models.

Stop assuming a gentle drift back to 2010s conditions. Build your base case on what the OBR is actually projecting: trend growth of about 1.5 per cent, productivity at 1 per cent, tax-to-GDP above 38 per cent and a rate structure that keeps gilts near current levels. That alone justifies higher hurdle rates for unsecured exposure and lower assumed recoveries once the state is competing with you as a creditor.

Use OBR sensitivities as real stress tests.

The OBR’s own downside scenarios – higher rates, weaker earnings, heavier welfare caseloads and local government stress – are not wild tails. Treat them as mandatory tests. Run a plus 100 to 200 basis point rate shock, a low productivity path, a welfare overshoot and a local authority crystallisation through your largest and most fragile exposures. If material parts of your book fail under scenarios the OBR itself publishes, your limits and tenors are too generous.

Align credit policy with the sector map.

Construction, real estate, consumer distribution and logistics are not normal sectors in this environment. They belong in a structural red bucket: shorter terms by default, tighter limits, stricter intervention triggers and a bias towards security wherever you have leverage. Suppliers whose income depends heavily on local authorities or NHS contracts should be treated as sovereign exposed SMEs, not as quasi public entities that can be left on autopilot.

Bring HMRC and local authority indicators into scoring.

Given the enforcement trajectory, tax arrears and council finance stress are primary indicators, not background noise. HMRC arrears, Time To Pay arrangements and enforcement notices should be standard inputs in your decisioning and monitoring. For public sector facing counterparties, Section 114 warnings, SEND deficits and reliance on exceptional financial support belong on the same dashboard as covenant breaches and rating downgrades.

Update governance assumptions.

Blue chip and public sector are no longer reliable shorthand for low risk. Central government is behaving as a disciplined senior creditor. Local authorities are carrying contingent liabilities that will be resolved either through further central support or through deep adjustments to services and supplier payments. Large private buyers are openly using their supply chains as shock absorbers. Governance frameworks, concentration limits and escalation paths should be written for this reality, not for a softer world that has gone.

The resources below are aimed directly at credit managers and risk teams who need to turn this analysis into policy, limits and monitoring.

Taken together, this Budget is a reset of the baseline, not a one off event. Credit teams who continue to price risk off the 2010s will be caught leaning the wrong way. The work now is to treat this settlement as the new normal and tune limits, terms and scoring accordingly, before the numbers force the point.

The information in this article is provided on an “as is” basis for general information only. It does not constitute, and should not be construed as, financial, legal, investment, credit or risk advice. Baker Ing does not accept liability for any loss arising from reliance on this analysis. Organisations remain solely responsible for their own credit decisions, modelling, policies and regulatory compliance.