John Healey prepares his first budget amid war-driven economic pressure

Resolution Foundation puts headroom estimate near £12bn

In a preview by senior economics correspondent Richard Partington, The Guardian says UK Chancellor John Healey will deliver his first budget on Wednesday with households and businesses under pressure from the economic shock caused by the war in the Middle East. The Guardian says six charts in the preview will underpin the chancellor’s decisions. Partington describes a “febrile backdrop in global markets” and says Healey faces a “delicate balancing act”: provide “breathing space” measures to ease the cost-of-living crisis while increasing growth and sticking to the government’s fiscal rules.

Fiscal headroom and bond-market constraints

At the spring statement, Healey’s immediate predecessor, Rachel Reeves, left £23.6bn of “headroom” under rules requiring day-to-day spending to be matched by receipts by the end of this parliament. The Guardian said the buffer was widely expected to have been slashed by a surge in debt-interest costs as the war in the Middle East caused a global inflation shock that rattled bond markets. The Resolution Foundation estimates that headroom has been halved to about £12bn.

Much will depend on the judgment of the Office for Budget Responsibility, the independent Treasury watchdog. The OBR will take account of rising debt costs and other positive and negative developments for the public finances, including inflation, pay growth, employment and productivity. Healey is thought to be willing to allow the buffer to take a hit. The Guardian reported that bond investors are expected to seek retention of some headroom to guard against further negative shocks, with at least £14bn thought necessary to avoid provoking a bond-market reaction.

Household relief and energy costs

The energy-price shock, fuelled by the Iran conflict, has reached consumers. Petrol and diesel prices have surged close to record highs, and energy bills are forecast to increase to £2,000 a year 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.

Healey has pledged “breathing space” measures for households and businesses. He is thought to have earmarked more than £1bn to help energy consumers, with most of the money going toward increasing the discount given to households receiving certain benefits. He has also vowed to help businesses and has been urged to extend a cut in fuel duty. Alongside energy support, Andy Burnham has promised Labour will cut living costs through other measures, including a new mortgage scheme for first-time buyers and a pledge to build more social homes.

Devolution, regional growth and youth employment

The Guardian says Healey’s budget will also flesh out Andy Burnham’s pledge to deliver “good growth in every postcode,” with measures to hand local leaders more money and power. Burnham has made “growth in every postcode” his top political slogan since becoming prime minister. The Guardian says devolution is likely to be a central theme of the budget, with a raft of measures expected to add some substance to the rhetoric.

Central to the devolution package will be plans to allow local leaders in England to retain a share of income tax, alongside a new £1.5bn borrowing facility for directly elected mayors.

The Centre for Cities think tank says Britain is the most centralised G7 country for tax and spending policy and is among the most economically unequal. The Guardian says the aim of redrawing the political map, including establishing a new No 10 hub in the north based in Manchester, is to increase regional economic growth and, with it, the “performance of the UK economy at large.” Burnham has also signalled that a strengthened industrial strategy will be key to his agenda, as well as measures to support high streets and towns.

Prime Minister Andy Burnham said Britain is facing an “economic catastrophe and a moral failure” after a rise in the number of young people not in education, employment or training (Neet) to almost 1 million. The Guardian says tackling the youth-jobs crisis will be a key budget theme. Business leaders have pressed Healey for tax cuts and help with labour costs to encourage youth recruitment, while ministers have explored options for overhauling the benefits system and making changes to apprenticeships.

Healey has indicated that welfare reform will be critical. The Guardian says savings from changes to the system could be offset by higher spending on employment support, and the government is handling the process carefully to avoid renewed opposition of the kind Keir Starmer faced over welfare. Recommendations are still awaited from two reviews by former Labour cabinet minister Alan Milburn and Department for Work and Pensions minister Stephen Timms.

The government is understood to favour handing local leaders more power and money to support young people as part of the solution. Analysis from the Youth Futures Foundation, a charity, shows that the risk of a young person becoming Neet is geographically uneven: rates are significantly higher in Blackpool, Birmingham and Bradford than in Bath, Harrogate or Guildford.

Defence, Brexit and migration

Having resigned as Keir Starmer’s defence secretary over funding, Healey is widely tipped to use his budget to find more cash for the military. Burnham has also spoken of the importance of the defence sector for his reindustrialisation plans. The government must first find an additional £1bn a year to fund Labour’s defence investment plan, which Keir Starmer announced in his final weeks in office and which put defence spending on track to reach 2.7% of gross domestic product by 2029.

Healey has expressed an ambition to spend 3% by 2030; the Institute for Fiscal Studies estimates that an extra £11bn would be needed in that year. The government’s longer-term target is 3.5% of GDP on defence by 2035, equivalent to a £25bn increase in today’s terms.

Burnham reopened the debate over Brexit in a speech to the Labour conference in Liverpool, arguing that leaving the EU damaged the UK economy and failed to bring the promised benefits. The Guardian’s preview frames the budget as a challenge for Healey to repair Brexit-related economic damage while also tackling the youth-jobs crisis. It also says this week’s budget is expected to underscore the economic hit, including from a drop in net migration.

Net migration to the UK has fallen sharply from a record peak of almost 1 million in 2023. Earlier this year, the Office for National Statistics downgraded its long-run estimate to about 230,000 annually from a previous assumption of 340,000. The Guardian reports that immigrants are net contributors to the exchequer on average, making the OBR’s accounting treatment of the drop critical. If the OBR adopts a similar approach to the ONS, the Resolution Foundation estimates that tax receipts could be £4.7bn lower by 2029-30 than in previous forecasts.