UK autumn budget: cost of living, defense and AI

UK Chancellor of the Exchequer John Healy tabled his first budget on Wednesday, announcing funding for defence, AI initiatives and measures to ease cost of living pressures.

The Autumn Budget contained dozens of measures aimed primarily at mitigating rising costs for the UK population, but Mr Healy was careful not to risk angering the market, which largely responded positively to his plans.

As a net energy importer, the UK is vulnerable to external energy shocks.

Inflation has risen sharply this year, with annual inflation reaching 3.5% in September due to soaring fuel costs. Markets expect the Bank of England to raise interest rates next month, but the government’s borrowing costs have risen significantly this year.

The British government, led by Prime Minister Andy Burnham, had promised to ease economic pressures ahead of the Budget.

Healey said Wednesday he would provide “breathing space” for his family and said the country needed a “fundamental change in energy,” citing the inflationary effects of the U.S.-Iran war, a conflict he “didn’t want.”

His measures included scrapping the current rate of gas heating for homes, extending electricity tax relief for millions of households until July 2027, and giving £100 ($133) checks to people living in the four areas with the lowest local housing tax. This will cost £2.6 billion.

Mr Healy said the policy, announced before the Budget was formally announced, would see tariffs removed on more than 100 food products. Small business relief from the Business Rate, the tax on commercial properties, will be extended to more businesses in the hospitality, retail and leisure sectors. Other measures include £15 million to provide books to children, funding to reduce homelessness and support for people to buy their first home.

The UK minimum wage will rise by 3.9%, while a planned reduction in tax-free savings thresholds has been scrapped.

But Mr Healy also promised to repeal the welfare bill, citing reforms to pensions and sick pay.

But he said: “We have no intention of seeing disabled people suffer humiliation at a system that ignores a million young people (or) proves ‘unfit for purpose’.”

The UK’s welfare bill, which will amount to 10.7% of UK gross domestic product (GDP) in 2024/25, has been the subject of debate in recent years. Former Chancellor of the Exchequer Rachel Reeves has watered down her plans to cut welfare spending after a revolt from members of her own party.

Mr Healy also announced investment in the development and regulation of the UK’s artificial intelligence industry.

“Nowhere is the role that nations need more clearly than in artificial intelligence,” he said as he announced hundreds of millions of pounds of funding for AI security and sovereignty.

He announced “regulations” for data centers in the country, saying they must meet “rigorous tests.” “It’s about investing in local communities, creating local jobs, and protecting local water supplies. In return, critical data centers will get the necessary grid connections and be allowed to build on-site generation while on standby, if needed,” Healy said.

Healy also announced tax breaks for founders, including a reduction in capital gains tax rates on profits of up to £10m.

Mr Healy said funding would also be pumped into various regional hubs to “unleash the UK’s innovation power”.

The budget also includes £10 billion in additional economic and military aid to Ukraine.

“Today we are sending a clear message to Moscow: the UK will stand with Ukraine for as long as necessary.” He added that more funds would be dedicated to defense to ensure the country meets its NATO spending commitments.

He said: “We will confirm that next year’s Spending Review will provide details on how we will deliver on NATO’s commitment to spend 3.5% of GDP on defense by 2035, with a target of 3% in 2030.” “In this era of new threats, the demands on the UK’s defense are increasing.”

Healey said his spending plan follows so-called fiscal rules set by his predecessor. Under these rules, the government’s day-to-day spending must be financed by tax revenue rather than debt, and debt as a share of GDP must be decreasing.

Alongside Wednesday’s budget announcement, the Office for Budget Responsibility predicted the government would have £15bn of fiscal space by the 2029/30 financial year.

“Despite the global challenges, this budget will eliminate the current deficit and put the UK on track to return to surplus within three years,” Prime Minister Healey told MPs before unveiling the full extent of the plan.

The OBR predicted on Wednesday that the national debt-to-GDP ratio would rise slightly to 83.8% next year, but decline steadily thereafter, reaching 81.7% of GDP by financial year 2032. He also upped his growth forecast for the UK, saying the economy is expected to grow by 1.2% this year, 1% in 2027 and 1.6% in 2028.

As Healy spoke, yields on British government bonds, known as gilts, fell. By 1:50 p.m. London (9:50 a.m. ET), the benchmark yield was 10 pension It was 5.323%, two basis points lower.

sterling Slightly weaker against the US dollar, down 0.2% Against the euro.

Mr. Healy said Wednesday that he would increase revenue “from people who can afford to pay.”

“There will be no tax increases on wages or dividends,” he said. “Tax cuts for millions of families and businesses.”

He announced that banks, gambling companies and vape shops would be taxed to cover the cost of the new measures.

Earlier this month, Mr Healey described British banks as the “jewels” at the top of the British economy, but said the levy on banks would now rise by 3% to 6%.

Mr Healy said Britain’s “world-class banks” make a “huge contribution” to the country and called on banks to provide funding for “breathing space” for British households.

The interim measures will come into force in January and end after 15 months.

The scale of the tax increase was not as severe as some industry observers had feared, and shares in London-listed financial institutions rose following the announcement.

British bank stocks rose. barclays The last seen was up 3.3%; Lloyds Banking Group It rose more than 2.6%. natwest group It rose by 2.5%.

JP Morgan ChaseCEO Jamie Dimon, who last month joined the bank’s lobbying campaign against the UK tax, said in a statement: “It is unprincipled to once again single out one of the UK’s biggest growth and job generators for another tax.”

“It also overlooks that the banking industry operates in a highly competitive global market,” a company spokesperson said.

Mr. Dimon previously suggested that if the government was “hostile” to the bank, he might reconsider building a multibillion-dollar addition to its new headquarters in London’s Canary Wharf financial district.

The company said on Wednesday it was “fully committed” to the UK.

—CNBC’s Hugh Leask contributed to this report.