UK Budget 2026: John Healy faces bond market challenges

John Healy may have only been Britain’s chancellor of the exchequer or prime minister for just 100 days, but he has already achieved what his predecessor, Rachel Reeves, failed to do.

Her annual budget buildup was scarred by weeks of speculation about which taxes would be raised, and even if some of the increases never materialized, the damage to business and investor confidence was almost as great as if they had been imposed.

By contrast, Mr. Healey, drawing on his experience as defense secretary, imposed tight security on Wednesday over the drafting of the inaugural budget, granting access to documents on a strict “need to know” basis.

This enhancement has significantly reduced rumors and speculation. Mr Reeves suggested before last year’s budget that he might break his party’s manifesto promise not to raise income taxes. In Healy, such kite flying did not exist.

Things have been going well so far, but things won’t be smooth sailing from here.

Last year, Reeves gave himself 24 billion pounds ($32 billion) of breathing room for the government to use before it breached fiscal rules. However, rising government borrowing costs have reduced this amount to just £10bn.

Fiscal rules require that day-to-day government spending be covered by tax revenues and that debt as a share of gross domestic product be reduced.

At the same time, Prime Minister Andy Burnham promised big spending. The latest, announced on Monday, was a £432m plan to tackle homelessness and people sleeping on the streets.

Other possible benefits include targeted support for poor households with utility bills and expanded tax exemptions for low-income pensioners.

Amanda Tikel, tax and trade policy leader at business services firm Deloitte, said Mr Healy would need to explain how he would pay for these and other small tax breaks already outlined, such as lower business rates (tax on commercial property) for pubs and small retailers.

“The thing I’m most looking forward to in terms of tax cuts would be an extension of the fuel tax relief,” he told CNBC.

“It should or could cost more than £2 billion, so we will need funding for that as well.”

The biggest challenge so far will be defense spending.

Mr Healy needs to clarify how the government plans to raise defense spending to 3% of gross domestic product (GDP) by the end of the decade, an issue that led to his resignation from Keir Starmer’s government in June and, along with Labour’s local election debacle, contributed to the former prime minister’s downfall.

Mr. Healey is expected to do most of his work by reducing fiscal buffers, citing the gaping hole left in the budget by the Iran war, but tax increases remain a possibility.

The target will be British banks, whose profits have been boosted by higher-than-expected interest rates for longer than expected, but it is not without risks.

JP Morgan Chief Executive Jamie Dimon has hinted that if taxes rise too much, the bank may reconsider its new tower in London, which will house half of its 28,000 UK employees.

Healey could instead target British financial institutions by reducing their ability to pay future taxes on losses accumulated during the global financial crisis.

The gambling sector is also expected to be hit, despite warnings that job cuts may be needed in response. flutter entertainmentThe Paddy Power and Betfair owner cut 1,400 jobs in the UK and Ireland earlier this month in response to recent tax increases.

But more difficult decisions could be made in the future.

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

Next year’s public spending review, in which the government sets future budgets for departments and public services, could be even more difficult for MPs who appear to be resistant to any cuts.

Even with this limited room for maneuver, Healy still seems to be planning on priming the pump.

The Financial Times reported at the weekend that £20.4 billion would be given to state-backed infrastructure banks and government-owned business lenders, the Wealth Fund and British Business Bank.

This exploits a loophole in the government’s fiscal rules, as the funds given to these institutions do not count as additional borrowing.

Another high-profile move is to shift control over taxes and spending from the central government to local governments.

Michael Saunders, a senior adviser at Oxford Economics and a former member of the Bank of England’s rate-setting Monetary Policy Committee, told CNBC that the budget would give mayors and local authorities more control over public spending, potentially allowing them to retain some of the tax revenue generated by faster economic growth.

“Rather than increasing the overall pot, it’s important to redistribute spending across regions and change who controls spending decisions.”

He warned that it would not help growth in the “next year or two”.

With the national debt at over £3 trillion, uncomfortably approaching the size of GDP, the government is not in a position to spend big.

Government bond investors are pushing for pro-growth policies aimed at cutting public spending, cutting borrowing and reversing some of the payroll tax hikes introduced under the Reeves administration.

They will be disappointed.