# Seasonal stupidity, but don’t panic

_The IFS Green Budget puts the Chancellor’s spending pressures at £35bn by 2030/31. Its growth forecast is too gloomy, and the gilt yields it takes from the market contradict its own forecasts for inflation and interest rates._

Neil Woodford · 15 October 2026 · 13 min read

![The Chancellor ](https://cdn.sanity.io/images/v3acfbvo/production/7b3c21c8101080ed352457daf96b88522abc5fd4-1672x941.png?w=1600&fit=max&auto=format)

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Possibly a little later than normal, the now traditional pre-budget round of alarmist economic commentary has begun. This time, it’s the IFS that has attracted most attention with Monday’s publication of its [Green Budget 2026 report](https://ifs.org.uk/publications/green-budget-2026-full-report), which outlines how the war in the Middle East combined with other “spending pressures and ambitions” has changed the forward-looking fiscal landscape in the UK. Interestingly, the IFS estimates that the fiscal headroom in 2029/30 only comes down by about £4bn to £20bn, after higher government debt interest costs are in part offset by higher nominal economic growth (because of its higher inflation forecasts), which of course boosts tax revenues.

_[Embedded media](https://x.com/TheIFS/status/2109558493212500237)_

However, because the IFS also concludes that higher inflation will erode the “spending power of departments’ budgets”, this will create pressure for even higher spending, which it estimates, combined with the government’s defence commitments, leads to a £35bn gap in 2030/31. The IFS goes on to suggest this will need to be addressed through tax rises or benefit cuts, or possibly through a combination of both.

_[Embedded media](https://www.theguardian.com/business/2026/oct/12/ifs-budget-report-spending-pressures-tax-inflation-john-healey)_

And so it begins. The pre-budget game of how awful it could be has begun and, just as in the recent past, the media will lap it all up with lurid stories about how far taxes will need to rise (another £35bn on top of the £66bn already implemented by Rachel Reeves) on top of the higher energy bills we will all have to face. Thankfully, this year’s round of pre-budget gloom has started a little later than normal and consequently shouldn’t have the damaging real economic effects seen in previous years, but it’s yet another disappointing chapter in the seemingly endless catalogue of downbeat economic forecasts.

Now, I am not going to spend the next few paragraphs ripping into the IFS paper for obvious failings because, on the face of it, it seems like a reasonably sensible piece of work. However, given that I disagree with its conclusions, I am going to point out where I think it’s got things wrong.

I think there are two significant failings in the report, one being the product of a different growth expectation and the other being a glaring inconsistency in the assumptions embedded in the IFS outlook.

_[Watch: We covered this topic on The Show this week — Does Britain Really Need £35bn of Tax Rises?](https://www.noisecancelling.co/the-show)_

## The growth assumption

First to the underlying growth assumptions in the report, because these are foundational to its conclusions. The Green Budget’s economic forecast is produced by Barclays, and here is how it compares with other “institutional” expectations.

![The most optimistic for 2026, not for 2027](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-seasonal-oct26-forecasts-aceee1f73eda-light.png)

_The Green Budget’s forecast is the most optimistic for 2026 and below the OBR’s and the IMF’s July forecast for 2027. From 2026 to 2031 it averages 1.45% a year._

Of note is the fact that the Green Budget is more bullish than the institutional consensus for 2026 but strangely more pessimistic for 2027. As I have pointed out in [previous notes](https://www.noisecancelling.co/read/clean-bowled-again), this consensus has been wrong for a while and is still too bearish. Growth in the first six months of 2026 has already beaten the full-year forecasts from the OBR, the Bank of England and the IMF shown above (the IMF has since raised its own to 1.3%), and I suspect the year’s outcome will be at or slightly above the Green Budget’s 1.4% number. What is quite odd is that the forecast goes from being relatively optimistic to pretty bearish for 2027, and it remains so for the rest of the period, with growth averaging 1.45% through to 2031.

## Why I expect growth to accelerate

Let me highlight where I think the IFS is wrong. The UK economy carries strong growth momentum into the final quarter of this year despite the headwind of a war and elevated energy prices, and should exit the year with a final-quarter year-on-year growth rate of 1.75%. Given this momentum and the underlying drivers behind this better growth outcome (a falling savings rate, commensurately higher household consumption and strong business investment growth), I expect it to continue into the new year. Having said that, I can immediately hear the siren voices saying: what about higher interest rates, higher mortgage costs, and a [potential 16–20% increase in the energy price cap](https://www.cornwall-insight.com/press-releases/16-price-cap-rise-forecast-in-january/) in January?

My answer is that these are indeed challenges, but they have been since February, and they did not stop the economy delivering a much better growth outcome than expected in the first half of the year and in July. It’s also the case that any economic forecast for 2027 should factor in some kind of policy reaction to the expected energy price cap increase in January, especially from a new prime minister who has put the cost-of-living issue right at the top of his political agenda.

To put this into context, the impact of higher mortgage interest rates for those rolling off five-year fixes is nowhere near big enough to undermine the positive impact of lower saving, which is already evident, and where a one percentage point reduction in the saving rate adds £20bn to household spending. If maintained for all of 2027, it’s true that increased energy bills could cost households an additional £8–9bn, but there are two things to consider here. The first is that even the most gloomy commentators on the conflict in the Persian Gulf do not see it lasting throughout 2027, and, as I have already said, my expectation is that there will be some kind of intervention to limit the increase in January despite the government’s limited fiscal headroom. In addition, instead of falling in 2026 as the OBR and the Bank of England forecast, business investment is enjoying [something of a mini boom](https://www.noisecancelling.co/read/the-investment-boom-the-obr-said-wouldnt-happen) and will exit the year growing at somewhere between 4% and 5%.

It is this momentum, combined with continued but slower growth in government consumption, which I believe will translate into better than expected growth in the UK economy in 2027. Of course, when there is some kind of settlement to the conflict in the Middle East, that will naturally lead to lower energy prices and eventually lower interest rates, which would add to this positive momentum, not just in 2027 but in 2028 and beyond.

So, in summary, unlike the emerging consensus, which is forecasting lower growth next year than in 2026, I see growth accelerating towards 2%. If the efforts to negotiate a settlement of the Iran/US conflict succeed, then the outcome could be even better than this, because energy prices and interest rates would both fall more quickly than I am currently assuming.

Regular readers will recognise this more upbeat perspective but still find it odd in the context of the much more gloomy consensus. All I would say in response is that the consensus was wrong about this year, not just about growth but also about the inflationary impact of the war, and I think it will be wrong again in 2027. My view is that most forecasters continue to underestimate the resilience of the household sector in the face of higher market interest rates, appear not to have grasped this shift in saving behaviour, and appear to have completely missed the renaissance in business investment catalysed by both the increased cost of labour and the investment in AI technologies. On Tuesday [the IMF raised its forecast](https://www.imf.org/en/publications/weo/issues/2026/10/13/world-economic-outlook-october-2026) for UK growth this year to 1.3%, from 1.0% in July. [The Independent’s report](https://www.independent.co.uk/news/uk/politics/uk-households-inflation-imf-burnham-healey-b3065391.html) of the upgrade ran under the headline “AI driving economic growth spurt in UK”, and noted that Britain’s outlook has improved “more than almost any other major economy over the past six months”. [I have been writing about this](https://www.noisecancelling.co/read/the-great-uk-productivity-myth) for over a year, and I am not surprised by this commentary, not least because the UK economy has a greater dependence on the service sector, where AI technologies are having the greatest impact, than almost any other major developed nation. Critically, this effect is not transitory. The increased investment in AI is boosting the economy, but then of course so are the productivity gains that will flow from it.

To conclude on this point, as ever it is expectations for growth in the economy which ultimately drive the answer to the government’s fiscal dilemma. If the IFS is to be believed, along with the rest of the economic consensus, and growth averages something close to 1.45% over the five years to 2031, then I can see why the government might need to cut spending, increase taxes, or do both to meet its fiscal rules and match its commitments, for example to the NHS and to NATO. On the other hand, if I am right, and growth accelerates to average 2% or better over this period, then a bigger economy does the heavy lifting for the government and it doesn’t need to increase taxes or cut spending (which of course it still should, but appears incapable or unwilling to do).

## Where the gilt yields come from

My second issue with the IFS paper concerns an apparent inconsistency in its forecasts, which are based on some crucial assumptions. One is its forecast for gilt yields and debt interest costs and the other is for base rates. The inconsistency that I see in these assumptions is a direct product of the way this organisation and others like it forecast what gilt yields will be in the future, and what debt interest costs will be as a result. Where they should be exercising judgement to anticipate what will happen, they instead take UK market interest rate expectations, which are shaped by “investors” and traders in government bonds and interest rate futures markets, and then imply rate paths from these market prices. This rather unscientific process is one [I have long been very sceptical about](https://www.noisecancelling.co/read/banging-on-about-gilts), not least because the “traders” in these markets are often buying and selling assets for all sorts of reasons that have absolutely nothing to do with judgements about what the future will look like.

_[Embedded media](https://x.com/TheIFS/status/2109558494764454295)_

At the margin, these relatively illiquid markets are moved by high-frequency traders, whose holding periods are measured in milliseconds (up to a maximum of a few minutes), using algorithms designed to seek out tiny price discrepancies and arbitrage opportunities. In other words, prices are set by “traders” who are thinking not about what the UK economy will look like in a few years’ time, but about millisecond-by-millisecond price inefficiencies. This means that these markets instantly react to new data, and buying or selling is triggered, for example, by a release being deemed to be slightly better or worse than expectations. The impact of the end of a globally important conflict which might be some weeks or months away, or the impact of AI on inflation or productivity, is not only a million miles from these considerations but totally irrelevant to them, and yet, for policymakers and for those making judgements about where interest rates and gilt yields will be in a few years’ time, they could not be more important. As a result, expectations markets have a tendency to be both highly volatile and to project the prevailing market conditions into the future, rather than appropriately assessing what the future will really look like (see the charts below). Consequently, they have a very poor record of accurately predicting future prices or yields.

![Market pricing for Bank Rate was wrong in both directions](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-seasonal-oct26-rate-paths-c0bb963e02a7-light.png)

_At the end of 2021 the market expected Bank Rate to peak at about 1.3%. It reached 5.25%. In July 2023 it expected 6.5%, and Bank Rate never went above 5.25%. Today the market expects about 4.9% by the end of 2027._

![The ten-year gilt yield moves with near-term rate expectations](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-seasonal-oct26-gilt-expectations-61ac82cc4ce4-light.png)

_When the market raises its expectations for short-term rates, the ten-year yield rises with them. The ten-year yield is 5.4% and the market-implied rate for December 2027 is 4.9%._

It is this fundamental disconnect between what drives these markets millisecond by millisecond on the one hand, and what should be relevant to longer-term judgements on the other, that I think is a critical error in the OBR’s and the IFS’s forecasting methodologies.

## The inconsistency

This error is made worse by the internal inconsistencies it then leads to. On the one hand, like the OBR, the IFS takes future gilt yields from market-implied pricing, which has the ten-year yield rising consistently over the period, to 6.2% by 2032. But the report’s own economic forecast, written by Barclays, has inflation averaging 3.0% in 2027 and falling to 2% in 2028, and as a result says that, despite the fact that base rates are already restrictive in the UK, they will increase to 4.25% by February and then fall back to 3.25% in the medium term. The IFS does acknowledge the split, in a footnote: Barclays’s forecast for Bank Rate differs from the market’s, but for the public finances “we use market expectations, which is what the OBR will use.” Acknowledging an inconsistency does not resolve it.

So, in the medium term the report has an inflation rate of 2% and base rates of 3.25%, but ten-year gilt yields above 6%. (To put this in context, right now we have [inflation at 3.1%](https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/august2026), base rates at 3.75% and ten-year gilt yields at around 5.4%.)

Before I offer up my own forecasts, it’s worth taking a moment to sense-check these assumptions, because when you do that the internal inconsistencies in the budget paper are revealed. So, according to the report, over the medium term inflation halves from the level it will most likely reach in January 2027, to 2%, and base rates will rise a bit then fall back to 3.25%. But despite inflation being at target and base rates 50bps below where they are now, ten-year gilt yields increase over the period to more than 6%. It’s this last bit that makes no sense and which is inconsistent with the report’s other assumptions, and yet it is a crucial aspect of the model, which helps drive the report’s conclusions about how fiscal policy needs to change to fund the higher debt interest costs it assumes.

Why would gilt yields increase when inflation has fallen back to the Bank of England’s target and base rates have fallen to 3.25%? The answer is that they wouldn’t. In fact, if appropriate judgement were being deployed here, either by the IFS or the OBR, then it’s clear that they would model gilt yields falling, not increasing, and my guess is that they would be much closer to yielding between 3% and 4%, not more than 6%. Ten-year gilt yields would also be driven by the yield on ten-year Treasuries, which history and theory (the Fisher equation) suggest would also yield something between 3% and 4% if inflation in the US had also fallen to its 2% target. It’s worth making the point here that where rates settle in this range depends on what the outlook for inflation is at the time. If the consensus view is that inflation is headed down, then yields would be at the bottom of this range, and correspondingly at the top end if inflation was headed up.

## My own forecasts

My own forecasts are different, but not a million miles from what I consider to be the more sensible parts of the IFS paper. In the medium term I expect inflation to fall below the Bank of England’s 2% target as the current energy shock unwinds following some kind of peace settlement in the Middle East, and as deflationary forces unleashed by China’s manufacturing exports and undervalued currency combine with productivity gains from AI. In my view, low and declining inflation will lead to lower interest rates than the IFS models, and so [I see base rates falling below 3.25%](https://www.noisecancelling.co/read/why-i-can-see-uk-interest-rates-below-3-next-year). And finally, ten-year Treasury and gilt yields will fall to the low end of the 3–4% range that history and theory suggest are consistent with this level of inflation and official interest rates. This monetary policy backdrop is also consistent with a period of stronger growth in the UK economy, which I see being driven by a return to a more normal relationship between household saving and consumption, and by much better than anticipated productivity gains from the investment in AI, the early signs of which are already evident in UK macro data. I would not be surprised if growth over this period averaged at least 2% a year.

## Summary

Regular readers will know that I am regularly [calling out OBR forecasting blunders](https://www.noisecancelling.co/read/truth-is-ever-to-be-found-in-simplicity). On this occasion, its errors are embedded in the process the organisation has adopted to predict where gilt yields will be in the future. That process, which relies on market-derived prices (market expectations), is in my opinion fundamentally flawed because of the mismatch between how these expectations are derived in markets and what actually determines where yields will be over the medium term. The process the OBR adopts in the case of gilt yields forms an important part of its portfolio of conditioning assumptions, which clearly have a significant impact on its five-year forecasts for the economy and the government’s fiscal position, which then end up driving fiscal policy decisions.

Because the OBR relies on these market-derived prices, it abdicates responsibility for exercising what it describes as its “expert judgement”. This inevitably results in the sort of forecasting errors and inconsistencies, in this case from the IFS, which I’ve highlighted in this note.

Because of the way these markets work, it is no surprise that they project recent experience and current consensus into the future, and that’s why they have a very poor record of anticipating the future, whether it’s oil and gas prices or interest rates and gilt yields. And yet the OBR, and by implication those that use its forecasts, continue to use them to forecast that future. It’s little surprise therefore that they keep getting things wrong, and it seems to me to be bordering on insanity to base policy decisions today on the output of such a flawed methodology.

Having said all that, I suspect that the new Chancellor will resist the siren voices calling for fiscal policy action today to cure a mythical problem in five years’ time, just as his predecessor did at her Spring Forecast in March. And if I’m right, and the consensus is wrong again, then a better than expected economic outcome in the UK solves most of these challenges anyway.