Healey allocates £1.42tn in first budget

Chancellor John Healey will allocate £1.42tn to day-to-day spending and public investment in his first budget on Wednesday. This expenditure sets the fiscal tone for Prime Minister Andy Burnham’s premiership. The spending plan reveals how the government will manage rising costs and debt obligations.

Debt interest will absorb £100bn of the total allocation. This sum reflects the government’s cost of borrowing, which has risen to multidecade highs. The increase is largely attributable to the Gulf conflict launched by the United States and Israel in late February. That conflict pushed oil prices above $110 a barrel and gas prices to levels not seen since late 2022.

The Resolution Foundation estimates that the government’s fiscal buffer has halved to £12bn. This reduction stems from the Treasury spending approximately £1bn a month more than originally forecast. Economists at ING note that the Treasury prefers to maintain headroom of about £15bn. The shrinking buffer complicates plans to fund cost-of-living measures, higher defence spending, and devolution projects.

Healey aims to provide consumers and businesses with measures to address soaring costs. The plan extends parental pay to over 150,000 additional parents annually, a benefit worth £388. This includes self-employed fathers and partners who previously did not qualify. The budget also ends the carer’s allowance cliff-edge, preventing unpaid carers from losing more than their allowance once weekly earnings limits are reached. Import tariffs will be removed on more than 100 products, including baked beans, chocolate, and gherkins.

Energy support will cost more than £1bn to assist poorer households with high bills. The bulk of this funding will expand the existing Warm Home Discount. An additional £100 may be added to the current £150 means-tested yearly rebate. Prime Minister Burnham has suspended VAT on electricity bills for six months. Standing charges on gas bills are expected to be abolished, following a request from the prime minister to the Treasury.

The budget will detail the “your first home” scheme, a revamped version of the Conservative “help to buy” programme. First-time buyers will receive a 20% equity loan towards new-build homes. This loan will have an initial interest-free period and require a minimum deposit of just 2.5%. The scheme was first announced at Labour’s annual party conference last month.

Healey plans to address a £4.7bn gap in the defence investment plan inherited from Keir Starmer. Funding will primarily come from cuts to other departmental budgets. A roadmap for reaching the target of 3% of GDP for defence spending by 2030 will not be released until the spending review next year. This delay occurs despite the chancellor’s resignation in June over the increase in defence spending.

The main revenue-raising measure expected is a levy on banks. The bank surcharge, a supplement to corporation tax, was cut from 8% to 3% by former chancellor Jeremy Hunt. Reversing this cut could raise more than £2bn a year. Banks have reported strong profits, with HSBC revealing a 32% rise in quarterly profit to about £7.2bn on Tuesday. Other potential tax changes include forcing online marketplaces to collect VAT on behalf of large-scale sellers, which could raise up to £1bn. This revenue may fund a cut in business rates for small high-street shops by raising the payment threshold from £12,000 to £18,000.

Alcohol duty is likely to rise in line with the retail prices index, increasing the tax on a pint from 50p to 52p. The freeze on fuel duty is expected to continue, avoiding an increase of 3p a litre in January and 2p a litre in March. Extending the freeze for an additional year could cost up to £2.7bn, according to the Institute for Fiscal Studies. The budget will also include a £150m funding boost for mayoralties and local authorities to support devolution. This package includes a £1.5bn borrowing facility and an initial £285m in “good growth” funding for local priorities. Plans for a new visa route for wealthy overseas individuals are understood to have been scrapped.