A nothing-burger budget, as ordered
Chancellor Healey’s first Budget landed almost exactly where we, and markets, thought it would.
Significant measures were conspicuous by their absence, while headroom against the stability rule now stands at £15bn in 2029/30, down from £23.6bn in March but in line with pre-event expectations. Even the framing, suggesting this buffer exists to absorb “global economic storms”, had been widely anticipated. That leaves difficult decisions for a spending review in 2027, with economic pain, and downside risk for sterling, deferred for now.
Looking at the few measures that were announced today, these were overwhelmingly pre-trailed, and largely unsurprising.
Zero VAT on electricity bills now runs to July rather than April, the fuel duty cut is extended to the same date, a £100 Household Energy Payment goes to roughly 20 million band A-D homes, and the minimum wage rises 3.9%. On the revenue side, the bank surcharge rises 3pp to 6%, admittedly smaller than the 8% floated in recent weeks, time-limited to 15 months. The rest is small beer in a Budget we suspect was designed to be forgotten.
Beneath the headlines, however, the picture is still uncomfortable. Borrowing is now seen at 4.2% of GDP this year versus 3.6% in March, while inflation is now projected to peak at 3.75% early in 2027, and the OBR has cut next year's growth projection to 1.0% from 1.6%, which makes a back-loaded recovery to 1.8% by 2029 look hopeful to us.
More fundamentally, the Budget punts on any hard decisions. The Defence Investment Plan is funded, but the route to 3% of GDP by 2030 will not be clear until next year’s Spending Review; welfare reform awaits the Milburn and Timms reports, and a consolidation pencilled in by Chancellor Healey’s predecessor remains untouched. By our estimates, that leaves £30-50bn of annual spending pressures to be reconciled with a £15bn buffer.
In any case, for sterling, today changes little. As a non-event, this budget offers some temporary relief, but more radical surgery is still required to align government promises with fiscal realities.
Hoping external conditions will improve remains an unconvincing strategy. So while the pound has escaped immediate fallout, trading little moved post-event, the bill coming due in 2027 remains unpaid, and that should keep medium-term risks tilted to the downside.