The government has delayed the toughest spending decisions – but here’s what we do know after the budget

John Healey’s steady-as-she-goes budget was a picture of a government doing its best to offer “what help we can afford”, while weathering the economic storms. But despite its 98 policy measures, decisions on some of the biggest issues appear to have been kicked down the road. In the meantime, it seems that the real incomes of UK households could fall by 1% next year. This forecast, from the Office for Budget Responsibility (OBR), offered a grim picture. It also predicted UK economic growth of just 1%, as well as higher inflation and interest rates. The OBR, the government’s independent spending watchdog, has also suggested that by 2029-30 households will still be only 1% better off than they were ten years previously. This would be the slowest growth in real disposable household income for generations. And in further bad news for households, the OBR estimated that the tax collected by the government as a percentage of GDP would reach record levels by 2030-31 – six percentage points higher than pre-pandemic levels. Taxes are already higher than at any time since the second world war. The budget was enthusiastically backed by Labour members. But it can also be seen as a holding operation by the chancellor, reassuring the markets while leaving the prime minister the space to develop his vision of the causes close to his heart. These of course include social care, devolution and welfare reform. Notably, the only measure which in relative terms was generously funded was the £500 million allocated to end rough sleeping, the cause Burnham cited as his priority on his first day in office. The limited measures to help with the cost of living reflect Burnham’s concerns about tackling the issue that most worries the public, but they are modest in scale and for the most part temporary. Read more: Budget 2026: experts on what John Healey’s ‘breathing space’ plan means for households The Treasury’s modest ambitions are reflected in the limited scale of the additional taxes it has announced to fund cost-of-living measures, especially to help with energy prices. The government has found some taxes it can raise and some efficiency savings it could make. However, most of the cost-of-living measures – which will cost £6.5 billion this year – are only temporary, while some of the tax increases occur later in the parliament. As a result, the government expects that within five years the situation will be reversed, with Treasury revenues up by £7 billion. One move that could have a long-term impact is Healey’s changes to the spending rules to protect “preventive spending” from department cuts. These are measures that have an initial cost but eventually save money. An example is the SureStart childcare programme, for example, which has been shown to improve long-term education prospects and reduce crime in deprived communities. Back to welfare and defence But the government has postponed its most difficult decisions – on defence, social care, devolution and welfare spending. The latter, the most politically challenging, awaits the publication of two key reports on welfare next month. The Timms and Milburn reviews will report respectively on personal independence payments, and the number of young people not in education, employment or training (Neet). Any big decisions are likely to take shape after the publication of the prime minister’s ten-year plan (expected in December), and next year’s spending review, which will flesh out spending plans up to the next general election. The urgent need to boost defence spending to 3% of GDP by 2030 was the issue that led Healey to resign from the previous government. In his first budget as chancellor, despite insisting this target would be met, he was cagey on how it might be financed. He cited “innovative financing measures”, which might include off-the-books contributions from the private sector through PFI (private finance initiatives) and the use of government investment banks, which may not be subject to the same fiscal rules. Healey also sees defence spending as part of the government’s industrial strategy, and ministers have announced that foreign firms that win defence contracts of more than £50 million will have to deliver benefits of the same amount back into the UK. There will be less money for roads as the UK’s defence spending ramps up. Jevanto Productions/Shutterstock Another thing we do know is that defence investment will also be funded by forcing all other departments to cut their own spending by 1%. This is a pattern Healey may repeat to fund other new spending commitments. In fact, the OBR estimates that, after taking into account the future spending plans of the “protected” departments (health, education and defence), all other departments would need to cut their own spending by 2.6% to allow the government to meet its 2030-31 fiscal target. This would mean less for roads, prisons, the police, housing, and higher education. “Efficiency savings” would be unlikely to close the gap. The chancellor has taken over at a particularly difficult time for the world economy, and European nations are among the hardest hit. Healey will need luck as well as skill to navigate the shoals of a global slowdown. However, it is already clear that the prime minister’s desire for closer ties with Europe to boost growth is not shared by the chancellor. Many events – from a resumption of full-scale warfare in the Strait of Hormuz to the possible collapse of the AI bubble – are beyond Healey’s control. He has temporarily reassured the bond markets with his cautious “do no harm” budget. But delivering improved living standards and better public services to a still-jaundiced electorate remains an enduring challenge.