Chancellor John Healey will deliver his first budget on Wednesday as UK households and businesses face mounting pressure from a global economic shock triggered by the war in the Middle East, according to reporting on the budget preparations. The Guardian reported that the chancellor must balance providing relief for the cost of living crisis while maintaining growth and adhering to fiscal rules. Against this febrile backdrop, Healey will also detail plans to deliver what Prime Minister Andy Burnham has called "good growth in every postcode", with measures to give local leaders greater financial resources and authority.
The Office for Budget Responsibility, the independent Treasury watchdog, will play a crucial role in determining Healey's fiscal room for manoeuvre. At the spring statement, his predecessor Rachel Reeves had left £23.6bn of headroom against the fiscal rules. However, the Resolution Foundation estimates this buffer has been halved to approximately £12bn due to surging debt interest costs caused by the Middle East conflict. Bond market investors are thought to be watching for the chancellor to retain at least £14bn in headroom to guard against further shocks. Healey is believed willing to allow the buffer to take a hit, though market volatility creates pressure to maintain a safety margin.
Energy support will form a central pillar of Healey's cost of living measures. Healey is understood to have earmarked more than £1bn to help energy consumers, with the bulk going towards increasing discounts for households on certain benefits. Petrol and diesel prices have surged close to record highs, and energy bills are forecast to reach £2,000 annually from January for the typical household. Since 2021, consumers have paid almost £14,000 on average in additional costs for mortgages, loans, energy and water bills. The chancellor has also pledged to help businesses and is expected to extend a cut in fuel duty.
Devolution will be a central theme, with plans allowing local leaders in England to retain a share of income tax alongside a new £1.5bn borrowing facility for directly elected mayors. Britain is the most centralised G7 country for tax and spending policy and among the most economically unequal, according to the Centre for Cities thinktank. Tackling youth unemployment will also be critical. Prime Minister Burnham has said Britain faces an "economic catastrophe and a moral failure" as the number of young people not in education, employment or training has risen to almost 1 million. Business leaders have pressed for tax cuts and help with labour costs to encourage youth recruitment.
Defence spending represents another significant challenge. Healey, who resigned as Starmer's defence secretary over funding, is tipped to secure additional resources. The government must first find an additional £1bn annually to fund Labour's defence investment plan, which puts spending on track to reach 2.7% of gross domestic product by 2029. However, Healey has expressed ambition to spend 3%, which the Institute for Fiscal Studies estimates would require an extra £11bn in that year. Longer term, the government is targeting 3.5% of GDP by 2035, equivalent to a £25bn increase in today's terms.
Brexit's economic impact will also underscore the budget. Net migration to the UK has fallen sharply from a record peak of almost a million in 2023. The Office for National Statistics downgraded its estimate for the long-run figure to approximately 230,000 annually, down from 340,000 previously. Since immigrants are net contributors to the exchequer, this drop matters significantly. The Resolution Foundation estimates that if the OBR adopts a similar approach to the ONS, this could lead to a drop in tax receipts of £4.7bn by 2029-30 relative to previous forecasts. For UK savers and borrowers, these fiscal pressures mean the government has limited room to provide relief or increase public investment without further straining public finances.