Healey’s ‘warm-up’ budget will leave radical reformers cold

Liz Truss’s disastrous “mini budget” still looms large in the minds of many international investors, who continue to regard the UK the way a babysitter regards a well-behaved child who once set fire to the curtains. John Healey’s message to investors today was that the curtains are safe. His budget marked the latest stage of the UK’s efforts to re-establish trust and a reputation for predictability – in this case, by sticking largely to the course set by his predecessor, and announcing very little that wasn’t already expected.

In terms of the big picture, little has changed. The economy has been unexpectedly resilient to the impacts of the Iran War. Taxes are still going up to post-Second World War highs. Borrowing is still set to come down, albeit at an ever so slightly slower pace. The current budget surplus – the amount by which revenues exceed non-investment spending, which is what gets targeted under the fiscal rules – is now forecast to be £15bn or 0.4% of GDP in 2029–30, versus £24bn or 0.7% of GDP under previous plans.

Burnham and Healey have effectively picked up the Starmer and Reeves plan and ran with it. However you cut it, this was a small budget. The absence of fiscal fireworks is interesting in itself: it’s a judgement that a minimalist approach is the right one, when financial markets remain volatile and the economy is showing encouraging signs of momentum. It could also reflect the limited time the top team has had to develop significant reforms.

It’s no coincidence that work on the most ambitious and far-reaching part of the budget – the plans to devolve tax powers to mayors – started under Reeves’s time as chancellor. We’re left, then, in a bit of an economic holding pattern. The big decisions – on defence funding, welfare reform, social care, pensions policy, public utilities, and much else besides – are yet to come. This sets up 2027 to be an extremely consequential year. In the here and now, Healey described his budget as having two themes: “breathing space” and “hope for tomorrow”.

I’d add two others: pragmatism and delay. Let’s take each in turn. “Breathing space” There was a lot of focus on “everyday fixes”, the sorts of policies that are tiny in isolation but which the government hopes will add up to a warm glow. Energy. The biggest item was a £100 rebate on energy bills for all households in council tax bands A to D, coming with a one-off cost of £2.6bn. The fact that it will be sent directly to people’s bank accounts shows that Burnham and Healey understand the importance of salient policies that people notice.

Related articles: The institutions that will be at the heart of Healey’s first budget A bold budget this week will deliver the business-friendly socialism Britain badly needs Mileage rates. On top of that, the chancellor increased tax-free mileage rates for those who drive for work; unilaterally removed tariffs on various grocery products; the obligatory announcement that fuel duty won’t go up after all; and reformed carer’s allowance.

The last of these is worth discussing in slightly more detail. Carers . Individuals who provide at least 35 hours of care a week can qualify for carer’s allowance of £86.45 per week. Currently, if the carer earns more than £204 per week after tax, they no longer qualify and lose the entire amount. The government has announced that support will instead be tapered away gradually, rather than removed all in one go, so that for each £1 the carer earns, they only lose £1 of benefits rather than the full amount.

The marginal tax rate on an extra hour of work becomes 100%, rather than more than 8,600%. That’s still pretty tough on those affected, but it’s a dramatic improvement on what we had: no sensible system would leave someone financially worse off if they take on additional hours or get a pay rise. Here’s hoping that next time around the chancellor tackles other mad features of the system that still need fixing, such as the cliff-edge withdrawal of childcare subsidies at £100,000.

No breathing space for landlords (who will see a two percentage point increase on income tax on their rental income) or those who get their income from savings (who will also see their tax rate rise by the same amount). The Treasury document notes that around half of the revenue raised from this change is expected to come from the top 10% of households. Banks were also hit by a temporary increase in the surcharge they pay on corporation tax, from 3% to 6%, raising around £900m next year.

“Hope for tomorrow” Despite the heavy focus on short-term fixes, there were a few bits of meaningful long-term policy in there. Tax devolution. In policy terms, the lasting legacy of this budget will be tax devolution. While not the sort of thing that racks up millions of views on TikTok, the reforms announced today represent a genuine rewiring of the UK state. The full details will have to wait for another newsletter, but the gist is this: mayors will get to keep a portion of the income tax and business rates paid in their area.

That gives them an incentive to grow their local economies, more flexibility over how the money is used, and greater ability to borrow against those revenues. This stuff matters. Gas bills. In addition to the extra cash support towards energy bills this winter, the chancellor also announced that he’s scrapping standing charges on gas bills for 23m homes. That’s the fixed daily amount paid by everyone, regardless of how much gas they use.

To compensate, the variable price paid per unit of gas used will go up. This change – which won’t come into effect until late 2027 at the earliest – is good news for the majority of households, especially smaller families, those in smaller energy-efficient houses, and those who don’t use much gas. It’s bad news for bigger families living in draughty homes, and those who have the heating on a lot. It’s also green: it slightly adds to the incentive to use less gas, and to replace a gas boiler with a heat pump (because each additional unit of gas is now pricier, while electricity prices haven’t shifted).

Energy reforms. There were some noises about deeper energy reforms: moving some levies off bills and on to general taxation, under a new Cost Control Framework that sounds like a power-grab away from the Department for Energy Security and Net Zero; and further efforts to delink electricity and gas prices by renegotiating contracts with renewable providers. But these sound more like direction-of-travel ambitions rather than fully worked out plans.

Entrepreneurs. Healey devoted a fair chunk of his speech to entrepreneurs. The eye-catching announcement here was a new Founders Relief, offering a reduced 10% capital gains tax rate on up to £10m of lifetime gains. This will be met with dismay among the tax wonks who will question the economic rationale, but it makes for a good soundbite, so onwards towards a more complicated and less rational tax system we go. Pragmatism Healey’s statement displayed a healthy dose of pragmatism.

This was perhaps most apparent in his announcements on the minimum wage. Minimum wage. Labour’s 2024 manifesto included a commitment to removing “discriminatory age bands”, so everyone aged 18 and above gets the same minimum wage (rather than having a lower rate for younger adults). To that end, the minimum wage for 18-20 year olds was increased by 26.1% in two years, versus 11.1% for those 21 or older. This coming year, Healey has put those ambitions on hold: the minimum wage for both age groups will go up by 3.9% (to £11.27 for 18-20s, and to £13.21 for older adults).

This is sensible. The data is messy, but there are plenty of signs that young adults are having a tough time starting out in the labour market. Whether or not the big increase in the minimum wage is to blame (the evidence isn’t conclusive ), another double-digit percentage increase in the hourly wage for 18-year-olds would only have made employers more reluctant to hire, at a time when there are already almost a million young people not in employment, education or training (Neet).

Even for the over 21s, Healey has displayed relative caution. Data published by the ONS last week showed that median hourly earnings in April 2026 were 5.8% higher than a year earlier. Given that the broad aim of minimum wage policy has, until recently, been to maintain the minimum wage at two-thirds of this median rate, Healey could have just about justified this sort of increase (which still might not have been enough to satisfy the unions and the Greens).

That he instead opted for a more pragmatic 3.9% rise indicates that he is willing to listen to evidence. One aside worth noting. A 21-year-old working 40 hours a week on the new minimum wage can now expect to earn £27,456 a year. Someone who took out a student loan since August 2023 is on plan 5, meaning their loan repayments kick in at 9% on anything above £25,000. It’s not just graduates earning high incomes who are paying back their loans.

It’s any graduate in a full-time job. Delay Part of the reason why the budget contained few surprises was that on all sorts of fronts the big decisions have been delayed until next year. In some areas that’s because the all-important review or commission telling the government what to do hasn’t reported yet: including the Neets crisis (waiting for the Milburn review), disability benefits (the Timms review), pensions policy (the pension commission), and social care (the Casey commission).

Other big choices have been pushed to the 2027 spending review – most notably, any plan for when and how the UK will spend 3% of GDP on defence. Added to that, sitting beneath the numbers in today’s statement is a fiscal sleight of hand. Inflation over the next few years is now expected to be higher than in the forecasts produced in the spring. As a result, tax revenues will be higher (for one, higher prices in the shops mean higher VAT receipts).

Healey banked those. But higher inflation also means that public service budgets won’t stretch as far. Healey ignored that. He left his spending plans for the rest of the parliament unchanged, and thus less generous in inflation-adjusted terms. The OBR document notes drily that these plans imply £11bn of cuts to “unprotected” budgets (ie those that aren’t defence, the NHS, schools or international aid) between 2029 and 2032. The only way to deliver on those will be to make substantial cuts to large swathes of the state, which would require reductions in public sector headcount, pay, or both.

I suspect that when the chancellor and prime minister are faced with that reality at next year’s spending review, the plans will change, and money will be found from somewhere. For now, the can has been kicked, and the official forecasts continue to be based on spending numbers that basically nobody believes. A warm-up act? So, perhaps my main takeaway is this: 2027 is going to be an eventful year. Today’s budget was merely a warm-up act.

We have a lot to look forward to. There’s never been a better time to sign up to my economics newsletter , and share it with your friends, family and colleagues. What do you think? Take part in our poll below. Illustrations by Maisie Cowell for The Observer Economy Budget John Healey