John Healey, the U. K.'s newly appointed finance minister, is readying to present his first budget on Wednesday. He's under financial strain and pressure from bond investors. His predecessor, Rachel Reeves, often faced tax hike rumors. But Healey has kept budget details quiet, minimizing speculation.
Healey's budget task is tougher due to a reduced fiscal buffer, which has dropped from £24 billion to £10 billion because of rising borrowing costs. This buffer is crucial for meeting fiscal rules, ensuring government spending aligns with tax revenues, and cutting debt as a percentage of GDP.
Prime Minister Andy Burnham's administration has outlined several spending pledges, including a £432-million initiative to address homelessness. Other expected measures include support for low-income households facing high energy bills and increased tax-free allowances for pensioners.
Amanda Tickel from Deloitte emphasized the need for Healey to clarify funding sources for these initiatives, including expected tax cuts like reduced business rates for pubs and small retailers. The possible extension of fuel duty relief, potentially costing over £2 billion, is also on the agenda.
Defense spending is another major challenge. Healey is expected to outline plans to boost defense spending to 3% of GDP by the end of the decade. This commitment was a significant issue during his tenure in Keir Starmer's government. The fiscal pressures make tax hikes likely.
U. K. banks, which have benefited from high interest rates, could be targeted for tax increases. However, JPMorgan CEO Jamie Dimon warned that excessive tax hikes might lead to a reevaluation of the bank's London expansion plans. Healey might instead limit banks' ability to offset past financial crisis losses against future tax liabilities.
The gambling sector is also expected to see tax increases despite potential job losses. Flutter Entertainment, the owner of Paddy Power and Betfair, recently cut its workforce by 1,400 in response to tax hikes.
Some decisions, such as addressing youth unemployment and welfare spending, are likely to be delayed. These issues are expected to be tackled in next year's public spending review, which could pose challenges for lawmakers opposed to spending cuts.
Even with limited fiscal space, Healey aims to stimulate the economy. The National Wealth Fund and British Business Bank are slated to receive £20.4 billion, exploiting a fiscal rule loophole that exempts these funds from being counted as additional borrowing.
Another major shift involves handing over tax and spending control to local authorities. Michael Saunders from Oxford Economics suggests this could allow local governments to retain tax revenues if their economies grow, although immediate growth benefits may not materialize.
With national debt exceeding £3 trillion, nearly the size of GDP, the government faces pressure to control spending. Bond investors are calling for reduced borrowing and measures to spur growth, such as reversing payroll tax increases enacted under Reeves.
