John Healey’s first Budget, scheduled for 28 October, will test how the Government reconciles its ambitions with financial reality, according to Philip Shaw.
The UK economy is expected to grow in 2026, but the public finances leave little room for immediate generosity. Shaw expects a broadly neutral Autumn Budget that maintains the gradual fiscal tightening inherited from Rachel Reeves, funds targeted spending through modest tax increases and defers larger decisions until 2027.
Limited room for new commitments
A new Spending Review could help ministers match Government priorities with available resources. Forthcoming welfare reports could also provide political cover for reforms and savings, Shaw says.
A shift in the fiscal target year in 2027 could improve fiscal headroom by £6.7bn, based on the 2026 Spring Forecast. March’s forecasts implied a £24bn buffer against the current-budget-surplus rule and a £27bn buffer against the debt rule. Both rules remain in place despite the change in political leadership.
However, higher gilt yields, interest-rate expectations and inflation may have eroded up to £15bn of the Chancellor’s fiscal room since March, limiting the ability to accommodate new commitments.
Growth and inflation outlook
Revised official figures suggest that output per hour grew considerably faster after the financial crisis than previously thought, potentially strengthening the outlook for tax revenues. The revisions currently stop at 2024, while changes to estimated hours worked complicate the picture. Shaw says the Office for Budget Responsibility may therefore wait for fuller evidence.
Growth in 2026 has repeatedly exceeded expectations, making the OBR’s 1.1 per cent projection appear low. Inflation is expected to be upgraded for 2026 and 2027; Investec’s forecast for 2027 inflation is 3.3 per cent.
Targeted household support
Household support is expected to focus on people most exposed to higher energy costs, with targeted assistance preferred over another expensive universal price cap.
A reported increase in the warm homes discount from £150 to £250 would cost £600m.
Prime Minister Andy Burnham has promised to prevent people relying solely on the state pension from becoming income taxpayers as pensions rise against a frozen personal allowance. The mechanism and cost of that promise remain unspecified.
Tax and defence pressures
A £1.2bn annual defence equipment funding gap needs to be addressed separately from longer-term defence ambitions.
Employee National Insurance, income tax rates, VAT rates and the main corporation tax rate are protected by manifesto promises. Together, they account for more than three quarters of central government tax revenues.
Possible alternative revenue measures include charging National Insurance on earnings above retirement age, increasing gambling duties and requiring online marketplaces to collect VAT.
Shaw expects a holding Budget that preserves confidence, addresses immediate needs and explains how longer-term ambitions can become affordable. More substantial decisions could be made next year if conditions are more favourable.
Related: UK savers withdrew £91bn from pensions before last year’s Autumn Budget
Source: City AM
