UK Chancellor John Healey Prepares First Budget Amid Economic Uncertainty
Healey's budget is expected to include measures for cost of living relief and a fuel duty freeze, funded by new levies on banks and online retailers.
Chancellor John Healey is set to unveil his first Budget, facing a challenging fiscal landscape shaped by public finances and global economic turmoil. The plan aims to provide "breathing space" for households with measures including energy bill support for lower-income families, a freeze on fuel duty, assistance for first-time homebuyers, and tax relief for small businesses. These initiatives are anticipated to be financed through increased levies on banks and a crackdown on online retailers like Amazon, eBay, and Temu.
Fiscal Headroom and Tax Measures
The Chancellor's scope for major spending initiatives is reportedly limited by stretched public finances and increased government borrowing costs, partly attributed to the conflict in Iran. The Office for Budget Responsibility (OBR) had forecast a fiscal buffer of around £24 billion in March, which some estimates suggest may have halved to £12 billion. The Budget is not expected to bring significant changes to income tax thresholds, continuing a "stealth tax" approach where frozen allowances lead to "fiscal drag." This phenomenon pulls more individuals into higher tax brackets as inflation raises their earnings, even if their real-term pay remains stagnant. Projections indicate that over half a million more people could be affected by the 40p higher tax rate by 2026-27 due to these frozen thresholds.
Support for Pensioners and Younger Workers
A new tax allowance is planned for low-income pensioners who are at risk of entering the tax system for the first time due to the state pension's triple lock increase. This measure is intended to counteract the effect of frozen personal allowances on state pension recipients. However, experts warn the solution may be complex and costly, potentially creating "cliff edges" for those with small amounts of private income.
In a move seen by some as a departure from previous pledges, the Chancellor is expected to implement a 3.9% rise in the national living wage, bringing the hourly rate to £13.20. However, a larger increase for workers aged 18 to 20, which was previously discussed as a way to equalize minimum wage rates, is not anticipated. Businesses have previously cited concerns about the cost of employing younger workers due to rising wages and National Insurance contributions.
Fuel Duty and Cost of Living
The fuel duty is expected to remain frozen at 53p per litre, with the existing 5p cut extended, in response to soaring pump prices influenced by global conflicts. Petrol and diesel prices have seen significant increases, with diesel exceeding £2 per litre earlier this month.
The government also plans to boost the warm homes discount to aid the poorest households facing rising energy bills, projected to average over £2,000 annually from January. Beyond the Budget, initiatives to ease the cost of living crisis have included changes to benefits for unpaid carers, a permanent increase in the tax-free mileage allowance, and reduced tariffs on certain food items. Parental pay provisions are also being extended to include more self-employed fathers.
Revenue Generation and Defence Spending
To fund these measures, the Chancellor is reportedly planning to increase the surcharge on bank profits from 3% to 8%, reversing a cut made in 2023. Trade unions have advocated for this move, estimating it could raise £9 billion over four years, though city representatives have expressed concerns about its impact on investment.
Additionally, a significant portion of the Budget is dedicated to addressing a £4.7 billion shortfall in defense spending plans. This includes allocating funds to the National Wealth Fund and the British Business Bank, with the aim of investing in UK defense firms. This allocation is seen as an initial step towards meeting the NATO target of spending 3% of GDP on defense by 2030.
Online Retailer Tax and Housing Support
Online marketplaces such as Amazon, eBay, and Temu are expected to be made responsible for collecting Value Added Tax (VAT) from all retailers on their platforms. This measure, which targets foreign firms potentially using shell companies to avoid taxes, aims to raise up to £1 billion and could support business rate cuts for high street shops. The proposed rules would require platforms to collect VAT for retailers with an annual turnover above £90,000, regardless of their location.
A new "Your First Home" scheme, similar to Help to Buy, is also set to be confirmed. This initiative could allow first-time buyers to purchase properties with a deposit as low as 2.5%, supported by a 20% equity loan that will be interest-free initially.
Items Not Included
The Budget is not expected to include increases to capital gains tax or reductions in the threshold for a "mansion tax." Details on the government's strategy for reducing the welfare budget are also deferred, with major reports on youth unemployment and disability benefits slated for publication next month, preceding proposed welfare reforms next year.