Chancellor John Healey will deliver Labour's first Budget on 28 October, setting out the government's plans for taxes and spending. He has not ruled out tax increases after acknowledging that government borrowing costs have reached historic highs. Before the 2024 election, Labour promised not to increase income tax, National Insurance or VAT. The Treasury will publish details of the measures and their costs alongside the Budget, while the independent Office for Budget Responsibility will assess the UK economy's health and provide economic forecasts.
The government faces pressure to balance increased support for households and defence spending commitments while adhering to two fiscal rules set by the previous chancellor: not borrowing for day-to-day spending by the end of parliament, and getting government debt to fall as a share of national income. In March, the Office for Budget Responsibility calculated a headroom of £23.6bn against the first rule, but this figure is expected to have fallen significantly due to rising borrowing costs. Analysts disagree on the extent of the decline, with KPMG forecasting it could fall to £12bn, while the Institute for Fiscal Studies estimates it could shrink to £20bn.
Speculation surrounds potential policy changes, including a possible tax increase on banks, which have been reporting strong profits. The government could raise the 3% surcharge on bank profits or increase the bank levy. Other areas being discussed include changes to Capital Gains Tax, an expansion of a first-time buyer scheme called Your First Home, possible tax collection responsibility for online retail platforms, and a decision on whether to extend the freeze on fuel duty that has been in place since March 2022.
The UK economy has shown resilience recently, growing 0.6% in the first quarter, 0.5% in the second quarter, and 0.1% in August. However, inflation reached 3.1% in the year to August, above the Bank of England's 2% target and driven by higher energy prices. The Bank of England held interest rates at 3.75% in September and signalled rates could rise if high energy prices continue.