By David Milliken and Andy Bruce
LONDON, Oct 28 (Reuters) – UK finance minister John Healey offered help on Wednesday to households buffetted by “global economic storms”, easing the hit from rising energy bills and helping drivers with fuel costs in the first budget of Prime Minister Andy Burnham’s government.
In a cautious set of tax and spending plans, Healey said he would raise taxes on banks, gambling, savers and landlords while also tightening value-added tax rules for online marketplaces – such as Amazon and eBay.
That would help to fund the cost-of-living package and some property tax relief to small businesses.
Healey warned about the impact of the conflict in the Gulf, which has driven up oil and gas prices, as well as from trade tensions and the war in Ukraine.
“Those are the storms we face. We can’t wish them away. We must choose the course we steer through them,” he told parliament in his first fiscal address.
On entering Downing Street in July, Burnham promised “the biggest changes in the last 40 years” in British politics, including a bigger role for the state in the economy.
But he and Healey, a former trade union official, have to tread carefully to avoid piling more bond market pressure on the government. Borrowing costs have risen globally this year, ensnaring countries like France which is struggling to shore up its finances amid a wave of social unrest.
“GRIM PICTURE”
The new budget measures included a £100 ($133) payment to around 20 million households living in lower-valued homes to soften a leap in their energy bills, costing £2.6 billion.
Healey also said he would support drivers by keeping a freeze on the level of fuel duty rates until at least July at a total cost of £1.4 billion over the period.
Britain’s budget forecasters said the plans, combined with higher inflation and borrowing costs, would add £65 billion to borrowing over five years and slow the pace of fixing the public finances in the near term.
The Office for Budget Responsibility warned that living standards would fall before edging only fractionally above their level before the COVID pandemic by the end of the decade.
“It’s a pretty grim picture,” senior OBR official David Miles told reporters.
David Aikman, director of the National Institute of Economic and Social Research think tank, said energy prices and borrowing costs might not fall back after 2027.
“If the bet comes up tails, the chancellor will have to change course and cut spending or raise taxes,” Aikman said.
But investors took comfort from Healey’s relatively low-key plans – with time limits on the support measures – after two big-tax, big-spend budgets of his predecessor Rachel Reeves.
British 30-year government bond yields – a barometer of investor sentiment about the public finances – fell by as much as 5 basis points to 5.691%, their lowest in more than a month.
“The market may be giving the chancellor the benefit of the doubt today, but attention will quickly turn from fiscal discipline to whether the budget can actually deliver stronger growth,” Andrew Chorlton, chief investment officer of M&G Investments’ £145 billion fixed-income business, said.
Shares in banks rose on relief that the £1.5 billion hit to the sector was not bigger. A levy on profits will rise by three percentage points to 6% for 15 months, less than the five percentage point increase some equity analysts had expected.
GROWTH DOWNGRADE FOR 2027
Britain’s economy has withstood the energy price shock from the Iran war so far. But the impact of rising inflation, which the OBR said was on course to peak at 3.8% in early 2027, and higher interest rates will be felt soon.
The OBR said gross domestic product would expand by 1.2% in 2026, barely higher than its March forecast of 1.1%, before growth slows to 1.0% in 2027. It would then speed up again.
Healey said he would use some of his buffer for meeting his main fiscal target, which shrank to £15 billion from a previous estimate of £24 billion, while meeting his commitments for repairing the public finances despite the Iran war shock.
“That’s what a buffer is for. Use it when you need it. Rebuild it when you can,” Healey said.
Other budget measures included removing standing charges on gas bills to help most households and extending tariff cuts on some imported goods including gherkins and marmalade.
More than £20 billion in extra support will go to state finance institutions to spur investment in artificial intelligence, defence and green energy by the early 2030s.
Regional mayors will gain more control over tax revenues to further Burnham’s devolution push.
Bigger policy changes – including how to fix the inflation hit to public spending and raise defence spending sharply – may now come in a 10-year plan that Burnham has promised and a broad spending review in 2027.
By then, the Iran war might have ended, lowering the bill for servicing £3 trillion of public debt which cost an extra £14 billion in the current financial year, far more than any of the measures in the budget.
But in the short term, £2 billion of public investment projects face being scrapped next year alone to fund higher defence spending, according to the new budget projections.
Some Labour lawmakers said Healey’s plan would tide the government over during the winter months when energy costs hurt the most. But several expected Burnham would call an election in 2027 to free himself of former Prime Minister Keir Starmer’s promises including a pledge not to raise the main rates of tax.
Asked by a reporter if he could rule out calling an election in the next 12 months, Burnham said: “Yes, I can.”
($1 = 0.7527 pounds)
(Additional reporting by Suban Abdulla, Elizabeth Piper, James DaveyWriting by William Schomberg; Editing Toby Chopra)
Comments