Energy Crisis Shapes UK Budget as Chancellor Faces Pressure Over Defence Spendin
John Healey’s maiden Budget is likely to omit clear plans to boost defence spending, reform taxes and curb the welfare bill, economists have predicted, in a move that would kick “tough decisions into the long grass”.
Healey, who resigned from Sir Keir Starmer’s government over the Treasury’s refusal to set out how it would lift spending on the military to three per cent of GDP by 2030, is expected to delay several major financial decisions until a Spending Review in 2027.
Raising defence spending to three per cent of GDP from a current level of around 2.7 per cent would amount to approximately £11bn more in expenditure each year.
City economists have predicted that the Chancellor will deliver a string of small policy measures to support households and businesses with cost pressures, and maintain a fiscal buffer large enough to avoid spooking the markets.
Pantheon Macroeconomics economists Rob Wood and Elliott Jordan-Doak told clients that they expected the Budget to deliver “less headroom” and “kick tough decisions on defence and other spending into the long grass”, which could push up government borrowing costs further as bond traders fret over the sustainability of the government’s finances.
“Avoiding addressing known spending pressures now undercuts the credibility of planned fiscal consolidation,” they said.
“Markets would need to believe that a government politically unwilling, or unable, to tighten now could deliver even larger consolidation immediately before an election.”
They warned that the Budget will “fail to account for tens of billions of all but already committed” spending, pointing to the likelihood of public sector pay increases and defence funding coming next year.
Peel Hunt economist Kallum Pickering said the government had also made “no serious commitment to fix either the UK’s distortive tax code or the perverse incentives caused by a bloated welfare system”. He added that Andy Burnham’s government suffered from a “credibility discount” given Labour’s struggles to rein in spending in the short-term.
Healey’s promise to ‘get energy costs down for good’
During Wednesday’s statement, the Chancellor is widely expected to deliver short-term aid to households and some businesses through energy subsidies and an extended freeze on fuel duty.
A support package would be aimed at easing pressures from soaring inflation in the early parts of 2027 due to continued trade disruption of crucial supplies across the Gulf region.
In a video message ahead of the statement, Healey said he would preside over a Budget that offered “breathing space” to businesses and households. He also promised to deliver long-term measures to “get energy costs down for good” and to “strengthen national security and our defences”.
“We’ll do all of this responsibly, sticking within tight fiscal rules, and make sure every pound is well invested,” he said.
Morgan Stanley analyst Bruna Skarica warned that traders could see temporary, one-off measures to support households with cost pressures as permanent, adding that the City would closely monitor the “perceived plausibility of the fiscal plan”.
Heightened scrutiny of financial plans will come just a fortnight after the International Monetary Fund endorsed the UK government’s plans to narrow the deficit over five years.
Spending Review will be ‘firmer test’ of spending restraint
City firms have predicted that Healey will set his fiscal headroom at around £15bn and raise receipts by about £5bn through a higher banking profit levy and taxes on online retailers.
Next year’s Spending Review could come into greater focus as a result of delayed decisions.
ING economist James Smith said: “In delaying this process for 12 more months, the Treasury no doubt hopes lower borrowing costs will buy it some extra spending room. But if you’re also thinking of an early election, then a Spending Review is something you’d almost certainly want to do afterwards.”
Berenberg bank’s Andrew Wishart separately said the review would be a “firmer test of the government’s resolve to cap spending”.
Reviews on benefits for young people and disability payments are expected to come in the weeks after the Budget, although it is uncertain whether either report will propose welfare spending cuts in the near-term. Prime Minister Andy Burnham has said he wanted to “get the welfare bill down”.
Shadow chancellor Andrew Griffith urged Healey to “take tough decisions instead of continuing to kick the can down the road”.
“If John Healey fudges defence spending rather than properly funding the three per cent by 2030 in his Budget, he must resign,” Griffith said.
“Defence is the first duty of any government, and we cannot leave our armed forces waiting any longer.”
By City AM
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