Britain's financial markets appeared comfortable with last week's budget. Its business leaders were considerably less enthusiastic.
By 2pm on 28 October, the FTSE 100 had gained 0.2 per cent, the more domestically focused FTSE 250 was up 0.3 per cent and government bond yields had fallen, according to analysis published by the Confederation of British Industry. Bank shares performed particularly well, with the FTSE 350 banks index climbing 1.2 per cent. Some of those gains faded by the close, when the FTSE 250 finished 0.2 per cent lower.
For John Healey, the chancellor, the reaction offered reassurance that his first budget had avoided a confrontation with investors. For companies facing high energy bills, expensive borrowing and subdued demand, the assessment was rather different.
A survey by the Institute of Directors conducted immediately after the announcement found that 53 per cent of business leaders viewed the budget negatively, compared with just 19 per cent who responded positively.
The contrast captures a central weakness in Britain's economic position: restoring confidence in the government's finances does not necessarily restore confidence among the businesses expected to drive growth.
A budget that avoided surprises
Mr Healey's approach was deliberately cautious. Rather than announcing sweeping changes to the tax system, the chancellor preserved the headline rates of corporation tax, income tax, National Insurance and VAT. Several targeted measures offered support to entrepreneurs and businesses, while additional taxes were concentrated on selected sectors.
For investors concerned about Britain's fiscal credibility, that predictability mattered. At 2pm the yield on the benchmark ten-year gilt stood at 5.31 per cent, five basis points below its opening level, according to the CBI. The pound traded at around $1.33 after recovering from an earlier fall.
Those movements were modest, but they suggested investors had found little reason to reassess the immediate risks of lending to the British government. The chancellor had delivered a budget that markets could absorb. Whether it was a budget that companies could build on is a more complicated question.
The banks had reason to celebrate
One of the more revealing reactions came from the banking sector. The government announced a temporary increase in the surcharge on bank profits from 3 per cent to 6 per cent, starting in January and lasting 15 months.
On its own, a tax increase might seem unwelcome news for bank shareholders. Yet bank shares rose on budget day. The explanation lies partly in expectations: investors had feared a return to the 8 per cent rate, and the temporary nature of the increase limited concern about its long-term effect on profitability.
It was a reminder that markets respond not simply to whether a policy is favourable, but to whether it is better or worse than expected. For banks, the chancellor delivered a tax rise that was manageable enough to leave share prices higher. Other businesses were less fortunate.
Smaller companies wanted more
Small businesses entered budget week with different priorities: relief from energy costs, lower employment expenses and changes to a business-rates system that many regard as a burden on investment and expansion.
The budget offered some help. The threshold for small business rate relief was raised from £12,000 to £18,000, and measures supporting entrepreneurs, including Founders Relief and wider access to employee share schemes, were well received.
But the Federation of Small Businesses argued that the government had failed to address the pressures on companies beyond the sectors receiving direct help. Its quarterly survey, published two days before the budget, found that 47 per cent of small firms expected their revenues to fall, while only 22 per cent expected growth.
That is a troubling outlook for an economy seeking stronger private investment. A restaurant receiving rates relief may benefit immediately. A manufacturer facing high electricity costs and weak orders may find much less to welcome. The distinction matters because Britain's growth problem is not confined to a handful of struggling industries. It extends across a business environment in which the cost of expanding remains high and the prospects for stronger demand remain uncertain.
New incentives, familiar obstacles
Some elements of the budget were aimed more directly at future growth. Additional money for the British Business Bank and the National Wealth Fund, measures to encourage company founders and greater backing for innovation were designed to improve access to finance and help promising businesses expand. The government also announced further support for artificial intelligence.
These initiatives address genuine weaknesses. British start-ups have often struggled to raise the capital needed to grow into large international firms, and better access to investment could help keep innovative companies and activity in Britain.
But finance is only part of the problem. A business considering expansion must also weigh labour costs, energy prices, taxation, regulation and the likely strength of demand. More capital does not remove those calculations.
The CBI welcomed support for business finance but said the budget lacked the larger measures needed to make investment, hiring and expansion more attractive. Its criticism points to an important distinction between helping businesses raise money and giving them the confidence to spend it.
The next test is not in Westminster
Britain's economic outlook remains difficult. The Office for Budget Responsibility expects growth of just 1 per cent in 2027, with inflation forecast to rise to 3.4 per cent. The Bank of England, which held its benchmark rate at 3.75 per cent in September, announces its next decision on 5 November.
For businesses that depend on borrowing, the combination of weak growth and persistent inflation is particularly uncomfortable. Interest rates determine the cost of financing new equipment, opening new sites and managing working capital. Inflation affects wages, supplies and the prices companies must charge. Neither pressure can be removed by a single budget.
The government's immediate challenge is therefore less about persuading investors that Britain can manage its public finances, and more about persuading businesses that expanding in Britain is worth the risk. That requires more than temporary relief and targeted tax incentives. It requires a credible reduction in the structural costs of doing business, better conditions for investment and a clearer path to sustained growth.
Mr Healey has promised further reforms, with important decisions expected in the government's forthcoming economic plans and spending review. Businesses will judge those promises by what changes in their operating conditions.
The markets have delivered their initial verdict on the October budget: they accepted it with little disruption. The more consequential verdict will emerge over the coming months, in companies' investment plans, hiring decisions and balance sheets.
A budget can reassure investors in a single afternoon. Convincing businesses to invest in the country's future takes considerably longer.
