Healey’s first Budget brings a £100 energy payment and a higher bank tax as the OBR cuts 2027 growth to 1%

Chancellor John Healey unveiled a £100 payment towards energy bills and a bank tax in his first Budget, targeting the cost of living amid global economic turmoil¹. Millions of households will receive the energy payment from January⁵, and the Budget includes a rise in the tax on banks¹³.

Income tax thresholds, including the point where people start paying the higher rate, have been frozen for three more years⁶. Healey told government departments to make 1% cuts, with the savings going towards the Defence Investment Plan⁸. He pledged to spend 3% of GDP on defence by 2030²⁵. The minimum wage will rise, but 18 to 20 year-olds will not get the bigger increase⁹.

Opposition parties said the Budget was not bold enough¹. The impact of the Iran war has limited the chancellor’s options⁴.

Why it matters to investors

The Office for Budget Responsibility cut its forecast for UK growth in 2027 to 1.0% from 1.6%¹⁵, while raising its estimate for this year to 1.2% from 1.1%^14,24. It forecasts CPI inflation rising to 3.5% next year, against an earlier projection of 2%¹⁷. The watchdog said higher energy prices will affect prices, living standards and growth², and its outlook for living standards was cut¹⁶.

Borrowing costs are a growing drag²². The OBR forecast a £14bn increase in government debt interest payments this year as the fiscal headroom shrinks^21,22. OBR chair Jonathan Haskel said debt interest payments have risen because of the increase in bank rates²³. The OBR gave the chancellor narrow breathing space with a highly uncertain £15bn buffer¹⁷.

The gilt market took the Budget calmly²¹. Gilt yields eased and sterling fell slightly in a muted reaction²¹, and bond markets welcomed the £15bn buffer²⁰. Additional gilt issuance is planned, but not on a scale that has unsettled UK bond markets¹². Two-year yields rose a little, in anticipation of a Bank of England rate hike next week¹⁰.

What to watch

The next test is the Bank of England, which is on course to raise interest rates next week²⁰. The Budget does little to ease the pressure on the central bank to hike, with one forecaster seeing little reason to revisit its view that resilient growth and rising inflation mean rates will rise¹¹.

Many of the UK’s longer-term challenges remain unfunded and unaddressed, according to one assessment of the Budget²⁶.

The chancellor also set out grid connection incentives for data centers under a new “covenant”²⁷.