On 28th October, Chancellor John Healey will deliver his first Autumn Budget against a challenging economic backdrop. Higher inflation, elevated government borrowing costs and continued pressure on public services leave the Chancellor with some difficult decisions.
While speculation has focused on potential tax increases and cost-of-living measures, financial markets will be paying particular attention to the government's borrowing plans and its commitment to fiscal discipline.
Under Pressure
The government's fiscal position has deteriorated since the spring, with rising gilt yields and higher debt interest costs placing further pressure on the public finances. The Chancellor has reiterated his commitment to meeting the government's fiscal rules.
Some estimates are that the government's fiscal headroom has more than halved since March, falling from £20 billion+ to approximately £10 billion. This leaves relatively little room to accommodate weaker economic growth, further increases in borrowing costs or additional spending commitments.
Tax Rises
With limited fiscal headroom, tax increases remain a possibility. However, the government's existing commitments still constrain its options, particularly regarding the main rates of income tax, employee National Insurance and VAT.
Recent speculation has centred on higher taxation of banks, changes to property-related taxes and measures targeting particular sectors, including taxes on gambling and online retailers. The government is also considering further support for households facing higher energy costs. The precise measures remain uncertain.
Defence Spending
Defence spending will also be an important consideration, with heightened geopolitical tensions increasing pressure on the government to strengthen military capabilities and meet NATO commitments.
The government has already announced an additional £15 billion for defence over four years through its Defence Investment Plan. However, £4.7 billion of the funding package remains to be identified at the Autumn Budget.
Inflation and interest rates
UK CPI inflation reached 3.5% in September, well above the Bank of England's 2% target, increasing the risk that monetary policy will need to remain restrictive for longer.
The Budget's impact on interest rates will depend partly on the extent to which fiscal measures affect demand and inflation expectations. Measures that stimulate spending could add to inflationary pressures, while tax increases or tighter expenditure controls could weigh on economic activity.
The OBR's updated forecasts will therefore be particularly important in assessing the outlook for economic growth, inflation and monetary policy.
North Sea Oil and Gas: Jackdaw and Rosebank
The government has approved production at the Jackdaw gas field in the North Sea, which is expected to increase domestic gas production by around 6% at its peak, supporting energy security, employment and tax revenues. Attention now turns to the larger Rosebank oil field, where a decision remains outstanding.
Alongside the Jackdaw approval, the Chancellor announced a new £2 billion Energy Wealth Fund to reinvest oil and gas revenues into clean energy projects.
Spending: Tackling Youth Unemployment
Reducing the number of young people not in education, employment or training (NEET), currently around 981,000, is expected to be a priority.
The government has already committed £2.5 billion to expanding its Youth Guarantee and skills programmes, including employer hiring incentives, subsidised employment, apprenticeships and additional employment support. The Budget could provide further detail on these initiatives and announce additional funding for local employment and training programmes.
The government-commissioned Milburn review is examining the causes of rising youth economic inactivity, particularly among those with health conditions or disabilities. Its final recommendations, expected after the Budget, could propose significant reforms to welfare and employment support, including redirecting spending towards helping young people enter work.
Spending Review 2027
The government is expected to undertake its next Spending Review in 2027, determining departmental spending allocations beyond the current settlement, which runs to 2028/29 for day-to-day spending and 2029/30 for capital investment.
There has been speculation that the government could delay the review until as late as autumn 2027, potentially providing additional time for economic conditions and the public finances to improve before making difficult decisions on departmental spending.
With the Budget and the OBR’s updated forecasts likely to shape the outlook for gilt yields, inflation and Bank Rate, the coming weeks will be important for organisations planning to borrow or invest. If you would like to know more about our economic forecasting and treasury management services, including how the Budget could affect your borrowing and investment plans, please contact sjones@arlingclose.com.
