UK Budget 2026: John Healey faces bond market test

John Healey may have been Finance Minister or Chancellor of the United Kingdom for only 100 days, but he has already achieved something that his predecessor, Rachel Reeves, did not.

The lead-up to her annual budgets was marked by weeks of speculation about what tax increases she would raise, and while some of those increases never materialized, the damage to business and investor confidence was almost as great as if they had been imposed.

In contrast, drawing on his experience as defense secretary, Healey imposed tight security in preparing his inaugural budget on Wednesday, with access to documents permitted on a strict “need to know” basis.

The rise in power has resulted in far less rumors and speculation. Reeves had indicated before last year’s budget that she might break her party’s manifesto pledge not to raise income tax. With Healey, this type of kite was non-existent.

So far, so good: but from now on, everything won’t be simple.

Reeves last year gave himself room to maneuver – the margin available before the government breaks its budgetary rules – of £24 billion ($32 billion). But rising government borrowing costs have reduced this to just £10 billion.

Fiscal rules require that daily public spending be financed by tax revenues and that debt decline as a proportion of gross domestic product.

At the same time, Prime Minister Andy Burnham has made numerous spending commitments. The latest, on Monday, was a £432 million plan to tackle homelessness and rough sleeping.

Other likely benefits include targeted support for poorer households with energy bills and a higher tax-free allowance for low-income pensioners.

Amanda Tickel, head of tax and trade policy at business services firm Deloitte, said Healey must explain how he will finance these and other modest tax cuts already flagged, including a cut in business tax rates – a tax on commercial properties – for pubs and small retailers.

“The biggest expectation I have in terms of tax cuts will be the extension of fuel tax relief,” she told CNBC.

“This is expected or could cost in excess of £2 billion, so will also require funding.”

By far the biggest challenge will be defense spending.

Healey is to explain how the government plans to increase defense spending to 3% of GDP by the end of the decade, an issue over which he resigned from Keir Starmer’s government in June, contributing to the former prime minister’s downfall alongside a local election debacle for the ruling Labor Party.

Although Healey is expected to let the reduction in his budget reserve do most of the work, given that the war in Iran has burned a hole in his books, tax increases are still likely.

British banks, whose profits have been boosted by interest rates remaining higher than expected for longer than expected, should be targeted, although this is not without risk.

JPMorgan CEO Jamie Dimon has indicated he might rethink the bank’s new London tower, intended to house half of Britain’s 28,000 employees, if taxes rise too much.

Healey could instead target UK lenders by reducing their ability to offset losses accumulated during the global financial crisis against future tax bills.

The gambling sector is also expected to be hit, despite warnings that it may have to cut jobs in response. Flutter Entertainmentowner of Paddy Power and Betfair, cut 1,400 jobs in the UK and Ireland earlier this month in response to recent tax rises.

Yet more difficult decisions risk being rejected later.

Long-awaited proposals to tackle the youth unemployment crisis and soaring social spending will not be published until later this year.

Next year’s public spending review – when the government sets future budgets for public departments and services – could be even more difficult for lawmakers who appear opposed to any cuts.

Amid this limited wiggle room, Healey is still considering priming the pump, it seems.

The Financial Times reported this weekend that the National Wealth Fund and the British Business Bank, the state-backed infrastructure bank and state-owned business lender respectively, would receive £20.4 billion.

This exploits a loophole in the government’s budget rules, in that money given to these institutions does not count as additional borrowing.

The other notable measure will be to transfer more control over taxes and spending from central government to local authorities.

Michael Saunders, a senior adviser at Oxford Economics and a former member of the Bank of England’s monetary policy committee, told CNBC the budget could give local mayors and regional authorities more control over public spending and potentially allow them to keep some of the tax revenue generated if their economies grow faster.

“It’s about redistributing spending between regions and changing who controls spending decisions, rather than increasing the overall kitty.”

He warned that it would do nothing for growth “in a year or two”.

With the national debt having just passed £3 trillion, making it uncomfortably close to the size of its GDP, the government is in no position to do largesse.

Government bond investors want cuts in government spending, less borrowing and business-friendly measures aimed at boosting growth, such as reversing some payroll tax increases introduced under Reeves.

They will be disappointed.