With fiscal headroom under pressure, expect targeted support and modest tax rises in the Autumn Budget, leaving bigger decisions for next year, writes Philip Shaw.
John Healey’s first Budget on 28 October will test how the Government reconciles its ambitions with financial reality. Although the UK economy is on course to grow this year, the public finances leave little room for immediate generosity. We therefore expect a broadly neutral package that maintains the gradual fiscal tightening inherited from Rachel Reeves, with targeted spending financed by modest tax increases and larger decisions deferred until 2027.
Waiting could give the Chancellor a better foundation for those decisions. A new Spending Review would help ministers match their priorities to available resources, while forthcoming welfare reports could provide political cover for reforms and savings. An easing of the Gulf conflict might also relieve financial pressures. Meanwhile, next year’s shift in the fiscal target year could improve headroom by £6.7bn, based on the 2026 Spring Forecast.
The financial buffer could grow
For now, however, that headroom looks vulnerable. March’s forecasts implied a buffer of £24bn against the rule requiring a current budget surplus and £27bn against the debt rule, both of which remain in place despite the change in political leadership. Since then, higher gilt yields, interest rate expectations and inflation could have eroded up to £15bn of the Chancellor’s room for manoeuvre, limiting his ability to accommodate new commitments.
Will productivity forecasts change?
Productivity could eventually offer some relief, although we would not count on an immediate improvement in the forecasts. Revised official figures suggest output per hour grew considerably faster after the financial crisis than previously thought, potentially strengthening the outlook for tax revenues. With those revisions currently stopping at 2024, however, and changes to estimated hours worked complicating the picture, the Office for Budget Responsibility may prefer to await fuller evidence.
Its nearer-term forecasts are likely to send mixed signals. Growth this year has repeatedly exceeded expectations, making the OBR’s 1.1 per cent projection look low, but inflation also looks set for an upgrade this year and next. At Investec, our own inflation forecast for 2027 is 3.3 per cent. Higher earnings could bolster tax receipts, although uncertainty over how wages respond to rising prices makes the fiscal implications harder to judge.
Against that backdrop, household support should focus on those most exposed to higher energy costs. We expect targeted assistance rather than another expensive universal price cap, with a reported increase in the warm homes discount from £150 to £250 costing £600m. Extensions to electricity VAT relief, the fuel duty freeze and the temporary 5p duty cut are
also possible, underlining how difficult supposedly temporary concessions can become to withdraw.
The potential impact of new housing policies
Housing is another likely priority, through the Government’s “Your First Home” scheme. Eligible first-time buyers of participating new-build properties would receive a government-backed equity loan of 20 per cent, initially interest-free, alongside a deposit requirement of 2.5 per cent. Household income and local property price caps would target the support, while additional funding for council housebuilding could help address constraints on the supply of affordable homes.
Clarity should come
The Budget should also clarify how existing political commitments will be delivered. Prime Minister Andy Burnham has promised to prevent people relying solely on the state pension from becoming income taxpayers as pensions rise against a frozen personal allowance, but the mechanism and cost remain unspecified. Resources may also be allocated to regional devolution, while a £1.2bn annual defence equipment funding gap needs addressing separately from longer-term defence ambitions.
Help for businesses
For businesses, measures to encourage recruitment of young people, potentially through National Insurance relief, could accompany business rates reductions for smaller high street retailers. Such support would nevertheless need funding, and inherited plans already imply demanding spending restraint outside health and defence. We doubt ministers will try to balance the books by pencilling in future cuts so steep that their credibility becomes questionable.
Tax rises therefore look likely, although manifesto promises sharply constrain the choices. Employee National Insurance, income tax rates, VAT rates and the main corporation tax rate are protected, together accounting for more than three quarters of central government tax revenues. Alternatives include widening tax bases by charging National Insurance on earnings above retirement age, increasing gambling duties or requiring online marketplaces to collect VAT.
Sector-specific tax options
Banks and oil companies could also face additional taxes, while Capital Gains Tax changes remain possible through smaller rate increases or ending forgiveness at death. Full alignment with income tax appears to have been rejected, however, and entrepreneurs reinvesting in Britain might receive relief. Lowering the proposed mansion tax threshold also appears off the table, further narrowing the Chancellor’s revenue-raising options.
In conclusion: Expect little change
Ultimately, we expect a holding Budget that preserves confidence while addressing immediate needs and explaining how longer-term ambitions become affordable. Restraint now would allow the Chancellor to develop credible, funded plans for more substantial decisions next year, when conditions may be more favourable. The test is whether he can demonstrate progress towards the Government’s ambitions without making promises that the economy and public finances cannot support.
Important information: This article is for general information purposes only and should not be used or relied upon as professional advice. It is advisable to contact a professional adviser if you need financial advice.
