John Healey has acknowledged the UK faces a “difficult moment” but insisted he would put the country on a better path as he delivers his first budget on Wednesday against a turbulent global economic backdrop.
But despite the international uncertainty, the chancellor will signal “fresh hope for the future” as he attempts to sound a more optimistic note, by providing households with breathing space from rising cost of living pressures.
The budget, which will be interpreted as a signal of Andy Burnham’s intent, is nevertheless expected to be a relatively modest affair as Healey grapples with stark fiscal realities, putting off important decisions on tax and spending until next year.
“The world’s a highly uncertain place,” the chancellor said, in a video released before the budget. “Conflicts abroad are pushing up energy prices, and the cost of living here at home – piling pressure on the families, on businesses and on our public finances.”
Healey insisted the government would move to ease the cost of living “responsibly” by sticking to Labour’s self-imposed fiscal rules, as he attempts to reassure the markets that his plans for longer-term reform will make Britain “more resilient” from global shocks.
The chancellor has limited scope for big giveaways because of the stretched public finances, made worse by international market turmoil caused by the Iran conflict, but changes aimed at easing the cost of living are set to feature heavily.
In his pre-budget address, he added: “This budget is about getting through this difficult moment. But it’s also about putting Britain on a future path, a better future path.”
Healey is expected to offer temporary support for poorer families before a steep rise in typical energy bills in January; while pledging energy market reforms aimed at bringing down bills for all households in the longer term.
Andy Burnham recently told MPs he was keen to see the gas standing charge – a fixed daily levy on all users – abolished. The move would bring down bills for consumers who use less energy, and the cost would be picked up by those who use more.
Industry experts fear further investment in hydrogen and carbon capture is likely to bear the brunt of efforts to rein in extra spending, in a blow to the UK’s net zero targets.
As part of a series of “everyday fixes”, the chancellor is expected to end the carers’ allowance cliff edge, which has penalised unpaid carers for going over their earnings limit, even by as little as a few pence a week. Healey is also expected to cancel January’s planned increase in fuel duty.
The government has been under pressure to use the budget to set out a clear path for defence spending to hit 3% of national income by 2030 – a target Healey claimed to be committed to when he resigned as defence secretary earlier this year.
But while he is expected to confirm more investment in defence industries – described as a “downpayment” on hitting the target – Healey is expected to wait until next year’s spending review to confirm the timetable.
The budget will also set out a “roadmap” to devolving more tax revenues to local leaders in a significant shift towards moving spending power away from Whitehall to the regions and nations of the UK.
But the detail of Burnham’s devolution agenda in areas such as skills and employment support is not expected until the government publishes a white paper in the weeks ahead.
Cutting energy prices has the added benefit of bringing down inflation, helping to ease pressure on the Bank of England to raise interest rates. Markets are now expecting the Bank to hike rates four times, to 4.75%, over the next 12 months.
Healey is also expected to take action to offset part of the hit to the public finances from higher interest rates on government borrowing – the result of rising inflation and turmoil in global bond markets.
The government had to pay the highest yield, or interest rate, on new five-year bonds since 2008 on Tuesday, above 5%.
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City analysts say bond market investors will be watching the budget closely – though the upward move in UK yields, or interest rates, have echoed those seen in other major economies.
The UK’s economy has proved more resilient than expected in the face of the Iran conflict but recent data has pointed to a deteriorating outlook.
At a cabinet meeting last week, Healey told ministers that rising inflation caused by the conflict, which hit an in-year high of 3.5% last month, was the political backdrop to the budget.
Consumer confidence has fallen at the fastest rate since Brexit; while the number of businesses in financial distress has hit its highest level in more than two decades, according to data published by consultancy BTG on Thursday, with hospitality and construction hardest hit.
Healey struck an optimistic note, however, saying: “Britain’s economy is showing real signs of resilience: investment’s up, productivity is growing and we had the joint fastest growth in the G7 in the first half of this year.”
Healey will announce plans to increase the minimum wage by nearly 4% but slow the rise for younger people under the age of 21 after warnings that they are being priced out of jobs but prompting accusations that Labour had broken a manifesto pledge.
He is also expected to protect pensioners and those saving for their retirement by shielding nearly one million people from paying income tax and is preparing to make the government’s revived Help to Buy scheme more generous, in a boost to middle-earners.
To help offset the damage inflicted on the public finances by war in the Middle East, Healey is poised to raise taxes for Britain’s banks, potentially reversing cuts to the bank surcharge made by Jeremy Hunt, which would raise upwards of £2bn a year. Online retailers will be responsible for collecting tax owed by firms selling on their platforms.
The Tories said the chancellor was set to “shy away” from the difficult decisions, including bringing down the welfare bill, which the prime minister has said he does not want to do through “crude cuts”.
The shadow chief secretary to the Treasury, Richard Fuller, said: “Britain’s public finances are on a cliff edge. A ‘do-nothing’ budget will not solve the problems staring us in the face: a spiralling welfare bill, a crippling tax burden, mounting debt and rising global threats.”
The Lib Dems warned against a “steady as she goes” budget. Their deputy leader, Daisy Cooper, said: “Families are being squeezed from all sides, businesses face mounting costs and for many it feels like even the basic joys in life have become unaffordable.”
