Budget 2026: What will be in John Healey’s first Budget as Chancellor

John Healey will deliver his first Budget as Chancellor on Wednesday against the backdrop of a difficult domestic economic situation, made worse by the international market turmoil caused by the Iran war. So what can we expect from Mr Healey’s statement? The Chancellor will have limited scope for big Budget giveaways due to the stretched public finances. He is likely to have significantly reduced headroom – the buffer against his fiscal rules – at this year’s Budget because of the increased cost of Government borrowing resulting from the Iran war.

Mr Healey is sticking with the rules set by predecessor Rachel Reeves, requiring day-to-day spending to be financed by taxes rather than borrowing by 2029/30 and that public debt as a share of the economy should fall in the same year. In March the headroom was forecast by the Office for Budget Responsibility (OBR) to be around £24 billion but the Resolution Foundation estimates that could have halved to £12 billion. The Institute for Fiscal Studies (IFS) thinks it could still be around £20 billion.

Changes aimed at easing the impact of rising costs are expected to feature heavily in the Budget. The Prime Minister has ordered the Chancellor and Energy Secretary Miatta Fahnbulleh to examine scrapping standing charges from gas bills. He also wants to break the link to stop the price of wholesale gas setting electricity bills, even though the fossil fuel only makes up a small percentage of total generation. With pump prices for petrol and diesel soaring, Mr Healey is also under pressure to cancel January’s planned increase in fuel duty – the rate of the levy has not gone up since 2011.

The Treasury estimates that reducing paperwork for businesses could save firms around £800 million. The Chancellor has rejected the possibility of hiking capital gains tax, the levy on profits from selling assets, at the Budget despite calls from within Labour to make the rate closer to that on earnings. The Chancellor is reportedly considering increasing the surcharge on bank profits from 3% to 8%, reversing a tax cut for the sector launched by former chancellor Jeremy Hunt.

The Trades Union Congress, a supporter of the move, said the hike on the “bumper profits” of banks would raise £2.25 billion a year. But City representatives have claimed the move will stifle investment in Britain. The Chancellor has promised to fill a £4.7 billion black hole in Britain’s defence investment plan (Dip). The Dip, one of Sir Keir Starmer’s final major announcements as prime minister, promised an extra £15 billion of funding for the UK defence sector but only committed £10.3 billion to it, leaving the rest for Mr Healey to find.

The extra cash means Government spending on defence will rise to a 2.7% share of the economy by 2027. The path to Nato’s 3.5% of gross domestic product target by 2035 will be set out at the spending review next year but there will be keen interest in any signals Mr Healey gives about increases. The Chancellor resigned as Sir Keir’s defence secretary in a row over funding, arguing that it was necessary to reach 3% in 2030, something the OBR estimates would cost an extra £17.3 billion.

More than £600 million will be committed to various projects on the development and safe use of artificial intelligence, including £165 million for a national AI biosecurity initiative, an extra £120 million for the AI Security Institute and £60 million for a national cyber shield using AI to protect against hackers. A £7 million fund will be used for a feasibility study into a possible future bid to hold the Olympics and Paralympics in northern England.

An initial £285 million will be allocated as part of a plan to give mayors and regional leaders in England more money and power to invest in projects in their areas. More than £1 billion will be allocated for social and affordable housing. A further £432 million will be committed to the rough sleeping programme to get people off the streets in England.