The Zhitong Finance App learned that British Chancellor of the Exchequer John Healy announced his first budget on Wednesday to try to balance protecting household budgets, supporting the economy, and maintaining public finance discipline against the backdrop of rising global economic uncertainty, trade tension, and geographical conflict. Healy described the current environment as a “global economic storm,” and said that the government will use part of the fiscal buffer space to deal with inflation and cost pressure brought about by the war between the US and Iran, while striving to balance the regular budget balance in the 2029/30 fiscal year.
The core of this budget is to, on the one hand, relieve pressure on households through measures such as energy bill subsidies, and on the other hand maintain a fiscal path where loans and debts gradually decline. However, the UK's economic growth prospects have weakened, and the fiscal space available to the government is limited. It remains to be seen whether the budget can simultaneously achieve the goals of bailout, growth, and fiscal consolidation.
Use fiscal buffers to cope with external shocks
In her budget speech in the House of Commons, Healy said that trade tension is dragging down global growth, the Russian-Ukrainian conflict continues, and the war in the Middle East is further driving up costs for British businesses and households. He pointed out that the current situation is not an ordinary economic headwind, but a “global economic storm.”
The Office of Budget Responsibility (OBR) listed the war in the Middle East as an important factor influencing economic forecasts. Healy said that the government decided to use part of the fiscal buffer space established last year to absorb the impact of the Iran war and protect the economy and household budget. He stressed that the role of fiscal buffers is to be used when needed and rebuilt when conditions permit.
According to the budget forecast, the UK's fiscal buffer in the 2029/30 fiscal year will drop to £15 billion, then rise to £22 billion in the 2030/31 fiscal year. This change is broadly in line with economists' expectations, and also reflects the government's need to use part of its fiscal balance to deal with short-term external shocks.
Healy also promised that the UK will achieve a regular budget balance in the 2029/30 fiscal year, that is, daily public expenditure will be covered by government revenue. This goal is one of the core elements of the UK's fiscal rules, and it also means that the government must control the gap between daily expenses and income while supporting households and public services.
The borrowing ratio is expected to gradually decline, and the debt share will peak in the medium term
According to the budget forecast, the share of UK borrowing in gross domestic product (GDP) will fall from 4.2% in the 2026/27 fiscal year to 3.4% in the 2027/28 fiscal year, and further to 2.9% in the 2028/29 fiscal year and 2.1% in the 2029/30 fiscal year. Since then, the ratio is expected to drop to 1.8% in both the 2030/31 and 2031/32 fiscal years.
Debt as a share of GDP is expected to rise from 83.2% in the 2026/27 fiscal year to 83.8% in the next two fiscal years, then gradually fall back to 83.1% in the 2029/30 fiscal year, 82.3% in the 2030/31 fiscal year, and 81.7% in the 2031/32 fiscal year.
This means that the UK's fiscal consolidation will be a gradual process: the borrowing ratio continues to decline, while the share of debt gradually falls after peaking in the medium term. Considering risks such as external shocks and economic growth falling short of expectations, whether the government can implement this path will continue to influence the market's judgment on the sustainability of the UK's public finances.
Economic growth forecasts are divided, and the growth rate will be lowered to 1% next year
The performance of the UK economy this year was slightly better than previously expected, but growth prospects for next year have weakened somewhat.
The OBR raised the UK's 2026 economic growth forecast to 1.2% from the previous 1.1%, but lowered the 2027 growth forecast from 1.6% to 1%. Since then, the UK economy is expected to gradually pick up: 1.6% in 2028, 1.8% in 2029, 1.7% in 2030, and 1.6% in 2031.
Healy pointed out that the Bank of England and the International Monetary Fund have both raised their growth forecasts for the British economy before, and the OBR's increase in this year's growth rate also reflects that the British economy is still showing resilience under some external pressure. However, the reduction in next year's growth forecast shows that the government still needs to face challenges brought about by changes in the global economic environment.
For investors, the key is whether economic growth can remain stable during the fiscal consolidation process. If growth falls short of expectations, government tax revenues may be affected, thereby reducing future fiscal maneuverability.
Measures such as energy subsidies and bank tax increases have become budget priorities
In terms of specific policies, Healy announced a number of measures involving family relief, taxation, and the business environment.
First, the government will launch an energy subsidy program totaling 2.6 billion pounds to provide about 20 million households in local tax grades A to D with a subsidy of £100 per household to help ease the pressure on energy bills.
Second, the UK plans to raise bank surcharges by 3 percentage points from January 2027, with an implementation period of 15 months. Previously, the bank surtax was 3%, which was levied in addition to the 25% corporate tax. The purpose of this increase is to increase fiscal revenue, but it may also raise concerns in the banking industry about tax burdens and the competitiveness of the UK financial services industry.
Other measures include raising taxes related to high-value gaming machines, reducing the corporate asset disposal credit from £1 million to £500,000, restoring the £20,000 tax-free cash personal savings account (Cash ISA) limit originally scheduled to be lowered next year, and raising the threshold for small businesses to start paying commercial real estate taxes.
In terms of defense spending, Healy said that the government will provide full funding for the defense investment plan. The plan previously faced a funding gap of 4.7 billion pounds, and this commitment is aimed at responding to concerns about the UK's defense spending arrangements.
Overall, these measures reflect the government's attempt to balance household relief, tax revenue, and public spending needs within a limited fiscal space, but some tax increases may also cause additional costs to financial institutions and businesses.
Bank of England stocks rose, and treasury bonds and the British pound reacted relatively lackluster
Bank of England stocks rose for a while on Wednesday against the backdrop of bank surtax increases lower than previous market concerns. At one point, NatWest Group's stock price rose 2.8%, Barclays rose 2.7%, and Lloyds Bank Group rose 2.5%.
Earlier, the banking industry warned that if the bank surtax returns to the 8% reduction before 2023, it may weaken the international competitiveness of the UK financial services industry and have an impact on credit supply and investment. The industry lobbying organization UK Finance has also previously warned that higher bank surcharges may reduce loan size and domestic investment in the UK.
In terms of the bond market, there was limited overall change in British Treasury yields during Healy's budget speech. The 10-year UK Treasury yield fell 2 basis points to 5.33%, and the 2-year yield remained flat at 4.94%. The pound hovered near the low of the day against the US dollar and the euro.
Market reaction shows that investors are still weighing budget fiscal discipline, tax increase arrangements, and economic growth prospects. The rise in bank stocks reflects the easing of market concerns about the extent of bank tax increases, but the relatively lackluster performance of treasury bonds and the British pound also shows that the budget has not significantly changed the market's overall judgment on the UK's macroeconomy and public finance.
The balance between fiscal discipline and economic growth remains to be tested
Healy said that the purpose of this budget is to provide support for Britain to cope with the current global economic shock, while at the same time clarifying the direction for future development. However, the challenge facing the government is not only controlling public finances, but also how to deliver on policy promises in an environment where growth is slowing and cost of living pressure persists.
The Labour government led by Prime Minister Andy Burnham hopes to continue the recent recovery in approval ratings through the budget, but the opposition Conservatives and the British Reform Party may still raise questions about defense spending, welfare spending, and the strength of economic reforms.
Overall, the UK's first budget chose to use part of the fiscal buffer space in the short term to provide energy subsidies to households, while increasing income through bank taxes and other measures, and setting a medium-term path for a gradual decline in the share of borrowing and debt. The fragmentation of economic growth forecasts reveals the difficulty of this strategy: the UK performed better than expected this year, but growth prospects for next year are weakening, and the balance between fiscal consolidation and economic support is still weak.
In the future, whether the UK can fulfill its regular budget balance promise and promote continued economic growth while coping with geographical conflicts and global economic fluctuations will be the key to testing the effectiveness of this budget.