John Healey talked of charting a new course for Britain, but this Budget was more about course-correcting than charging down a new path. It was abundantly clear that the financial fallout from that conflict in the Middle East has hampered the finances of households and businesses – and the government’s ability to help. While the government targeted those impacted by higher energy and fuel bills, the “breathing space” it aimed to provide was limited; it is a pill that doesn’t fully alleviate the pain. The most telling evidence was that official forecasters predict that while earnings will rise, that is not compensating for higher prices and taxes.
Even after the extra help is taken into account, households’ incomes after inflation and tax are set to be typically lower across the next two years than the start of the parliament. On that basis, it could be the second worse parliament for living standards, after the last one, since the 1950s – a sign of how far the war has blown prosperity off course. But it can’t be all be blamed on the war. Taxes haven’t helped.
Although there were few major measures aimed at households, the policy of previous chancellors of freezing the thresholds at which different rates of tax on income apply – fiscal drag – has been maintained in the background, scooping more money out of pay packets. Overall, this Budget has the tax burden – the proportion of the nation’s income going to the tax office – rising to a new historic high of 38.6% However, a more generous package of help would have been hard to pull off. The impact of higher inflation and debt have increased borrowing costs by £14bn in the past year alone. The Chancellor had to prove to the markets which lend the government money that he has a plan to bring down future debt to avoid those costs climbing further.
As it stands, debt interest repayments are due to be £160bn in 2032, more than double the amount spent on schools in England. And the plans Healey has unveiled already eat into wiggle room he has within the public finances. He says he was right to do so – that’s what such safety margins are there for – in times of strife. But the great uncertainty that remains made going further very risky.
Energy prices remaining high, for example, could easily chew up all the spare cash. So the result was what some have termed a beige, safe Budget. As Healey strove to prove his fiscally sound credentials, there wasn’t even the customary rabbit pulled out of the hat, the end-of-speech sweetener. The markets seem reassured – even if some of his tax raising plans involve clamping down on loopholes and those not paying the right tax, which is always highly uncertain.
Budget 2026: Key points at a glance Your pay, energy bills and savings: How the Budget affects you So the chancellor appears to have bought himself some breathing space. But that means some big questions have been postponed until another day, not least on public services. Higher-than-expected inflation may mean that if areas such as health and defence are prioritised, budgets for some other “unprotected” areas – justice and higher education for example – are set to lag behind inflation after 2028. There was a hint too from John Healey that he’d tap into some of those budgets to help out defence spending.
To maintain those budgets in 2030 would means finding tens of billions of pounds. And issues around the other big area of spending – welfare – remain unresolved. Between 2025 and 2032, spending there is set to increase by £100bn. The official forecasters also noted the rapid rise in sickness and disability caseloads since the start of the pandemic.
They warn if that trend continued, spending on such benefits would rise by a further £13bn. Any suggestion of welfare reform has been postponed until the forthcoming review into the plight of workless young people. Then there’s the issue of boosting growth. There was a bit more detail on the plans for devolution – but there is much to be fleshed out.
And on another key part of the growth strategy, housebuilding, there was disappointing news. Even though first-time buyers are set to get more help, their first home may be more elusive. Between regulation and higher costs – in part, related to the war – the OBR estimates that 190,000 fewer homes will be built by 2032 compared to what it thought in March, a significant setback. So the chancellor may have unveiled 98 (relatively small) measures but the to-do list gets longer.
With his official forecasters warning that, in a very uncertain world, his finances face exceptional risks, playing a wait-and-see game feels like a prudent move. The risks go both ways: the OBR points out that a swift resolution to the war and an improvement in the economy could spell a significant boost to the public finances. So the chancellor has more reason than most to keep his fingers crossed that happens rapidly. For as it stands, the official forecasters say incomes after inflation, living standards, are set to be only 1% higher at the end of the decade than at the start.
A series of economic shocks outside out control could thwart plans to turbo-boost prosperity . And as today shows, breathing space only extends so far.
