UK Budget 2026: Healey’s standstill Budget highlights a debilitating fiscal status quo
Red lights remain burning bright as overall picture on borrowing, taxes and public spending is little changed
It was never going to be a ‘big’ Budget, as along as the manifesto commitments on not raising major taxes were adhered to. And so it proved. This was a ‘breathing space’ budget, for both households and the government itself.
Essentially, there have been a number of minor - in public finance terms - support measures to help households with, for example, energy costs, partly paid for by a temporary tax surcharge applied to banks. However, the overall picture around borrowing, taxes and public spending is little different to before. Meanwhile, next year's Spending Review awaits for a more radical settlement to be brought forward.
While the speech lasted a good hour, going into some detail on small areas of public spending and revenues, the accompanying Economic and Fiscal Outlook by the Office for Budget Responsibility (OBR) highlighted how paltry such changes were. Combined alterations - since Rachel Reeves last fiscal statement in March - in total spending or tax measures for any single year up to 2031-32, amounted to less than £10 billion, 0.1 per cent of GDP. So, peanuts in the grand scheme of things. This is the fourth consecutive budget event where this has been the case. Hemmed in by manifesto commitments on tax and fiscal rules that preclude more borrowing, there is little that can be done.
Even then, the on-going budget red lights remain burning brightly. Public sector net debt (as a percentage of GDP) is forecast to be higher in 2031-32 than it is this year. Day-to-day spending on unprotected Departmental budgets (pretty much all Departments bar the NHS and Defence) after 2027-28 show negative rates of real terms (i.e. adjusted for inflation) growth, and by a substantial two per cent a year. Is this another bout of austerity coming our way? Or is it simply a highly unrealistic final outcome?
And if the public finances are not in great shape neither are those of households. The OBR publishes forecasts for ‘real household disposable income per person’, which it describes as “an indicator of living standards”. This measure fell in 2025-26 and is expected to do so again in 2026-27, to below the - pre-pandemic - level experienced in 2019-20.
These ‘real terms’ living standard falls take into account the higher inflation forecast, peaking at 3.75 per cent in early 2027. But things could get worse if the OBR’s, eternally optimistic, forecast decline to the Bank of England’s two per cent target rate does not actually come about in 2028.
However, higher interest rates could worsen things further for those with mortgages. The Bank Rate is now, on average, a full percentage point higher over the forecast period, compared to March, and pretty much flat at 4.75 per cent from late 2027 to 2032.
Any hope that an independent Scotland might evade some of this pain due to higher oil prices is quashed by the predictions of precisely zero UK oil and gas revenues by 2031.
So all eyes are now firmly set on next year's Spending Review to see how Andy Burnham’s brave new government can escape from this debilitating fiscal status quo.
Excluding the possibility that big cuts will be found in the welfare bill, then there are essentially two escape routes. The first, and best, would be for an economic revival, that, in turn, starts to refill the Treasury’s coffers. However, the OBR offered little hope in this area. All the Chancellors measured put together barely changed the dial on expected economic (GDP) growth. Furthermore, the recent upgrading of UK productivity by the Office for National Statistics - in terms of output per hour - was analysed and found to be of little consequence as “ultimately what matters for the outlook of GDP per person, average earnings and the fiscal forecast is growth in output per worker - which combines output per hour and hours worked”.
This then leaves tax rises. At present, this escape route is blocked by manifesto pledges not to raise income tax, (employees) national insurance, VAT and, effectively, corporation tax. But these are the biggest tax revenue sources, so without access to them then serious amounts of extra revenue - whether to fund Departmental budgets post 2027-28 and/or to start reducing debt and the associated interest payments - are not available. In the position the UK finds itself, it needs to increase broad based taxes to raise serious amounts of revenue. Popular as they are, hiking up taxes on banks, oil companies and the richest households would be insufficient.
It is difficult to see the new governments shine remaining in place for another three years without tearing up the last, highly restrictive, manifesto, whether through opting for a new election or as the inevitable consequence of ‘global crises’. Perhaps they could use the argument put forward by the great economist John Maynard Keynes, “When the facts change, I change my mind. What do you do Sir/Madam?”
Burnham’s conference speech was bold in its bringing up of ‘third rail’ subjects, but many of these were essentially costless. He, and Healey, have some big choices to make between now and the Spending Review and, unlike electoral reform or the relationship with the EU, these choices cannot be delayed for long.
John Healey concluded by saying that there was “a vision burned into every line of this budget statement”. Maybe so, but that vision needs funding and, at present, that’s the more difficult problem to solve.
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