Chancellor John Healey’s budget on 28 October is set to offer modest relief to households and small businesses under what he has described as a promise of UK budget breathing space, according to The Guardian. The statement is expected to be relatively low-key, raising a few billions in taxes (including on banks) and returning some of that revenue to consumers, while deferring several major spending decisions to a spending review in 2027.
For UK savers watching the fiscal backdrop closely, the key question is how much headroom the Treasury retains against Labour’s fiscal rules after a difficult period for the public finances.
Shrinking headroom and the cost of the Iran war
The source of pressure on Healey’s room for manoeuvre is a combination of higher interest costs on the UK’s debt and the economic drag from global events. Donald Trump’s military involvement in the Middle East has pushed up inflation, which in turn has raised the interest rate the government must pay to service its £3tn debt pile. Those higher servicing costs are likely to have more than offset the revenue benefit of stronger-than-expected economic growth, perhaps halving the £24bn of headroom that Healey’s predecessor Rachel Reeves had built against Labour’s fiscal rules, the Guardian reports.
Healey is said to plan allowing that headroom to absorb some of the strain rather than pursuing an aggressive tax or spending response. On energy support, Treasury insiders expect a relatively modest package, described as ‘targeted and temporary’ in line with International Monetary Fund guidance, of perhaps £1.5bn. The IMF itself, at its annual meetings in Bangkok, praised the UK as the only G7 country with a credible plan to address its budget deficit and urged the government to ‘stay the course’.
The backdrop facing consumers remains uncomfortable, however. The Bank of England is widely expected to raise interest rates the week after the budget, which would weigh on mortgage borrowers. Inflation is forecast to exceed 4% in the new year, and the energy price cap is expected to rise by around 16% in January. GfK’s latest consumer confidence survey, published on 24 October, recorded a sharp slide into pessimism, with the consultancy citing ‘relentless cost-of-living pressures’.
Political positioning and dissenting voices
Those close to Healey say his thinking centres on small businesses and self-employed sole traders, the people who make up the economic fabric of smaller towns and villages. ‘He has spent a lot of the time thinking about the cost of business and cost of doing business, something that’s driven him quite heavily,’ one source tells the Guardian. Key decisions, including the timing of defence spending reaching 3% of gross domestic product, are to be postponed to the spending review in 2027.
Not everyone is convinced that restraint is the right approach at this juncture. Sheffield University’s emeritus professor of political economy Michael Jacobs, who previously advised Gordon Brown, argues that Healey needs to do ‘something big and bold enough for the public to think, this is why we’ve got a new prime minister and chancellor’, warning that a ‘steady as she goes budget’ risks bewildering voters. Sanjay Raja, chief UK economist at Deutsche Bank, points to the unrest in France, partly driven by rising living costs, as a signal that governments should consider ‘temporary measures’ over the next two or three quarters to relieve pressure on households and, indirectly, on the Bank of England’s rate path.
Within Labour, a separate concern has surfaced around strategic coherence. ‘I am not sure how we reconcile the end of 40 years of neoliberalism and the approach of this chancellor,’ one Labour adviser tells the Guardian, an early indication of tensions between Healey’s fiscal caution and the broader ambitions some in the party attach to the Burnham project.
The budget statement on 28 October will be the first concrete test of how Healey and Prime Minister Andy Burnham intend to manage the public finances through a period of elevated inflation, geopolitical uncertainty and a debt stock that leaves limited room for error. One aide tells the Guardian that after the budget ‘we will be in election mode’, with most insiders believing Burnham is unlikely to delay a general election beyond May 2028.
