UK finance minister vows to keep fiscal position stable through economic storms

[LONDON] Chancellor of the Exchequer John Healey pledged fiscal discipline in the face of harsh global economic conditions, as he delivered the first Budget of Andy Burnham’s new Labour administration.

Addressing the House of Commons on Wednesday (Oct 28), he said the US-Iran war had fuelled inflation and “driven up costs on British families and on British businesses”, as he outlined measures designed to curb some of those impacts.

“Analysts like to speak of economic headwinds, but what we face today are global economic storms,” Healey, 66, told the chamber.

The chancellor said the government’s fiscal headroom would decline to £15 billion (US$20 billion) in 2029 to 2030, as it absorbed the impact of the conflict in the Middle East, in line with what economists had expected, and then rise to £22 billion in 2030 to 2031.

“I’ve chosen to use some of the headroom established last year to absorb the impact of the Iran war, to protect the economy, and to protect family budgets,” he said. “That is what a buffer is for. Use it when you need it. Rebuild it when you can.”

Gilts barely budged as the Chancellor spoke. The 10-year yield was two basis points lower at 5.33 per cent, while the two-year yield was steady at 4.94 per cent. The pound hovered near the day’s low versus the US dollar and the euro.

UK growth resilient

UK growth has been unexpectedly resilient this year, and the government’s fiscal watchdog raised its gross domestic product forecast for 2026 from 1.1 to 1.2 per cent, said Healey.

But in a sign of the headwinds expected, the Office for Budget Responsibility lowered the forecast for next year from 1.6 to 1 per cent.

Measures announced by Healey included:

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• A three percentage point hike in the bank surcharge, starting in January and running for 15 months
• A £2.6 billion package to give 20 million homes in council tax bands A to D a £100 payment to help with their energy bills
• An increase in gambling taxes on higher-stakes gaming machines
• A reduction in the business asset disposal relief for capital gains tax from £1 million to £500,000
• A reinstatement of the £20,000 tax-free cash Individual Savings Account allowance, which was due to be lowered next year
• An increase in the threshold at which small companies must pay business rates
• Said he was fully funding the government’s Defence Investment Plan, which previously faced a £4.7 billion funding gap

Burnham and Healey are hoping this Budget will sustain a poll bounce that Labour has enjoyed since the UK’s new premier succeeded Starmer in July.

Labour has increased to 28 per cent in surveys of voter intention from about 19 per cent just before Starmer’s resignation, going by Bloomberg’s composite poll, a rolling 14-day average using data from nine polling companies.

Billed as a steady-as-she-goes fiscal package while the government waits for global economic conditions to improve, the risk for Healey and Burnham is that the Budget is not seen to do enough to deliver on the new premier’s vision for a radical overhaul of Britain’s economy.

Healey promised the Budget would provide a new approach “to steer us through the global economic storms today, to chart a new course for Britain in the years ahead, to give people fresh hope for Britain’s future”.

A slim package also opens Labour up to potential criticism from the opposition Reform UK and Conservative parties, who have slammed Burnham for not doing more to fund defence and cut welfare spending.

Healey’s room for manoeuvre at the Budget had been restricted by the limitations of Britain’s public finances, with the £23.6 billion fiscal buffer he inherited from former chancellor Rachel Reeves estimated to have halved ahead of the Budget, due to the impact of the US-Iran war. BLOOMBERG