New government, same Budget deficit issue

Andy Burnham’s first week as Prime Minister has produced more tax and spending announcements than we often get in a Budget. It doesn’t feel like the new Chancellor, John Healey, will have had much influence over them and this barrage of announcements seems designed to set a political agenda and narrative. Whether it is good economics is another matter.

These announcements are clearly focused on the cost of living and putting more pounds in people’s pockets. That’s good for supporting the economy and particularly retail businesses but what do these announcements cost, when do those costs arise and how are they being paid for? The concern is that this flurry of giveaways is a precursor to tax rises to come in the next Budget, which is scheduled for this autumn.

Business rates and the high street

There has been a further cut in business rates for pubs, clubs and live music venues, with a 20% reduction in demands from April 2027. This looks like it uses the same structure as the January 2026 reduction for the same premises of 15%. That January announcement was after steep increases in the Autumn 2025 Budget and cost £80m. This latest announcement is a £100m reduction in tax revenue (cumulatively £180m).

Hospitality and tourism are important across the UK but especially in the South West. Any relief is welcome but it feels like small beer compared to recent energy and wages cost increases and while businesses are still recovering from pandemic closures.

In terms of funding this tax cut, there is a suggestion that the money will come from collecting more tax from online traders. It is hard to see this as a genuine funding explanation as surely HMRC was already targeting those businesses as part of its attempt to close the tax gap. Rather it feels like political messaging on a relatively modest cost – supporting the High Street rather than online trading.

Tax on household electricity bills

From 1 October 2026, VAT on household electricity bills will return to being zero-rated (currently a 5% rate applies). Note that this is only on electricity and would not have been possible without Brexit. It is billed as a cost of living measure but it is also reducing the cost of electricity over gas (so a green measure) and might play well with those who voted Leave.

Again, nice political messaging albeit with a slightly higher tax cost of £850m. This measure is being funded by scrapping the digital ID scheme. That feels like an investment in the future and should reduce government costs longer term. There is a question whether the digital ID scheme was already funded but even if it was it amounted to £1.8bn over three years. The VAT cut is ongoing. So funding of the tax cut is questionable.

Cheaper bus fares and ending rough sleeping

The government has announced cheaper bus travel from January 2027 for 12 months, including a third off some fares and a £2 cap, at a cost of £500m. This is another cost of living message and should help support the economy. Bus usage is lower in more rural areas though, albeit bus fares in those locations are often higher.

It seems that the cost is being largely met by cuts to the international aid budget over several years. If so, it is not fully funded upfront. Using the international aid budget to finance cheaper bus fares at home might play well with some voters and again suggests the political nature of the announcement.

Another area of focus for Andy Burnham is rough sleeping. He believes that central government needs to do more and has committed £340m towards it. The funding for this is unclear.

What’s the bill so far?

Tallying up this week’s announcements gives a total annual outlay of £1.8bn:

Whether these are funded or further action is needed to fund them in the forthcoming Budget is not clear. There is an answer on funding but it probably won’t survive scrutiny by auditors.

Defence spending and the Budget gap

There have been other developments since the Autumn 2025 Budget. There was a business rates cut in January by Rachel Reeves mentioned above at a cost of £80m and also her Great British Summer Savings Scheme which cost £300m. And then there is defence spending.

After much turmoil including the Chancellor’s resignation from his previous role as Defence Secretary, on 30 June, Starmer’s administration announced £15.0bn of extra defence spending over the four years from 2026-27 to 2029-30. Of that, £10.3bn has identified funding but £4.7bn is still to be funded. Once again, the identified funding looks a bit suspect.

The breakdown across the next few years is as follows:

This suggests there was already a hole in the government’s numbers, even before the impact of this week’s announcements. The challenges were already there and yet pressure is being applied by Andy Burnham for more largesse in the forthcoming Budget rather than belt tightening.

Fiscal outlook

The Budget deficit for the first quarter of the year (April to June 2026) was £57.6bn which was £2.7bn more than forecast in March. The forecast deficit for the year is £115.5bn and it is due to reduce to £63.4bn in 2029/30.

Twenty years after the financial crash it still does not look like the government will have their finances on a sustainable footing. By contrast, the deficit in 2010/11, before the Coalition government committed to reducing it, was £137.7bn.

Comparison with 2010/11

Andy Burnham has hinted at wanting to increase the personal allowance for income tax and at wanting to increase the additional rate of income tax back up to 50%. The former is raising expectations and the latter would be a breach of Labour’s Manifesto commitments.

The additional tax rate band of 50% was introduced in April 2010 on income above £150,000 (now 45% above £125,140). The personal allowance has been frozen at £12,570 since 2021/22 but was £6,475 in 2010/11. The basic rate band is pretty much the same as it was in 2010/11.

The capital gains tax (CGT) rate in 2010/11 was 18% (now 24%), and the CGT annual exemption was £10,100 (now £3,000). The inheritance tax (IHT) nil rate band was £325,000 in 2010/11 and still is although the contrived and complicated residence nil rate band has been introduced since.

My take on that comparison is that over the last 15 years, the tax burden on higher incomes and wealth has increased substantially and that the tax rate on lower incomes has reduced. Yet the new Prime Minister’s desire is to continue down the same path that we have been on for a decade and a half.

What does the Budget have in store?

We don’t yet know when the Budget will be. November is being suggested in the press and I can imagine that the Chancellor and the Prime Minister will want to put off the hard choices for as long as possible.

It looks clear that further tax rises are in the offing, whatever has been implied before. It is hard to see where meaningful tax revenue can be found while also trying to ease cost of living pressures. Rishi Sunak put up corporation tax, Rachel Reeves put up employer’s national insurance. In between Jeremy Hunt chipped at other tax rates and allowances. Most tax rates already look high by historical standards and there are very high marginal tax rates at various pinch points in our tax system.

My take from Andy Burnham’s first week is that he wants to have some goodies to hand out. Any tax decisions now look likely to be highly political, in a way that is reminiscent of George Osborne as Chancellor. In the words of Juvenal from nearly two millennia ago, “Bread and Circuses” – maybe it was always thus.

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