Autumn Budget 2026: Key takeaways

In stark contrast to last year, the window for speculation in the run up to this year’s Autumn Budget was relatively short, with comparatively little in the way of leaked potential policy measures to interest investors. Andy Burnham was seemingly keen for the first Budget of his premiership to be a relatively low-key affair. The prime minister and his newly appointed Chancellor, John Healey, have emphasised the importance of fiscal discipline at every opportunity – committing to keep to the previous administration’s fiscal rules. While the key tenet of Burnham’s still embryonic term has been to develop a roadmap for growth by devolving and redirecting power and funding to all regions of the UK, the government has been at pains to point out that fiscal credibility and growth must go hand in hand. 

The week prior to the Budget brought the news that total UK government debt had exceeded the journalistic milestone of £3trn for the first time in September, while the headline rate of inflation hit 3.5%. War in the Middle East and the ensuing energy price shock mean that inflation in the coming years will be higher than previously forecast. That has contributed to higher gilt yields – UK government borrowing costs – which have in turn contributed to greater government borrowing as spending commitments and interest costs increase. The government has borrowed £6bn more over the financial year to date than UK fiscal watchdog, the Office for Budget Responsibility (OBR), had forecast. 

The figures served to further highlight the challenge facing the Treasury. While frozen tax thresholds mean higher inflation will also increase tax revenues, higher debt interest payments, and inflation-linked spending costs have outweighed higher tax receipts. The UK is far from alone in battling these challenges, with many advanced economies being urged to stabilise debt levels. Running persistent annual deficits means national debt piles increase, and interest payments account for a growing share of government revenue, curtailing what might be spent on more productive endeavours. The UK’s debt interest costs now exceed £110bn annually.

Yet, at the same time, heightened geopolitical uncertainty has driven the need for greater defence spending, as well as a desire for greater domestic infrastructure investment – particularly to improve energy self-sufficiency.

The upshot is that the fiscal “headroom” Rachel Reeves was able to point to at the Spring Forecast was always likely meaningfully reduced. Healey continued to stress the importance of fiscal credibility – “a buffer against uncertainty” – alongside the trailing of additional cost-of-living giveaways. But another commitment – to stick to Labour's 2024 manifesto pledge not to increase the rates of income tax, employee National Insurance or VAT – meant Healey was always likely to face the same limited room for manoeuvre conundrum which confronted his predecessor. The most significant revenue-raising levers remained off the table, while spending control measures ran the risk of incurring the wrath of Labour party backbenchers.  

Healey was therefore widely expected to deliver a “do no harm” Budget, aimed at providing “breathing space” for households and businesses facing rising costs, rather than fundamental reforms. The hope being that exercising restraint would placate both markets and the electorate given the uncertain backdrop. And perhaps that resisting the temptation to reach for alternative revenue raising or cost saving measures might avoid the pitfalls which befell Rachel Reeves. Think agricultural property relief and employer National Insurance contributions. 

And so it proved. Healey’s budget included many small measures, but little of material significance. There is a risk that such an approach might ultimately prove insufficient to retain credit with bond investors. Healey chose to use the fiscal headroom as a buffer, allowing it to erode rather than finding meaningful additional measures to rebuild it. Pushing tougher choices to next year’s Spending Review, in the hope that lower oil prices and lower gilt yields materialise to improve the fiscal outlook, could backfire. Yet the initial bond market reaction was negligible. It seems “breathing space” and “do no harm” measures suffice for now. 

As alluded to, the move towards greater economic nationalism – particularly in respect of defence spending – has contributed to global bond market unease, with investors becoming increasingly wary of the trajectory of government spending. Therefore, the Autumn Budget was always going to be closely watched for any insight into how the Treasury seeks to finance government defence commitments within its fiscal constraints.

The UK Government's Defence Investment Plan (DIP) committed almost £300bn over the next four years. Healey – who resigned as Keir Starmer’s Defence Secretary in protest at the inadequacy of the DIP – confirmed that other government budgets would be further reprioritised to fill a funding gap in the plan. Healey also confirmed the target of raising defence spending to 3% of GDP by 2030 as a key milestone en route to fulfilling the NATO obligation of reaching 3.5% of GDP by 2035. But details of how that will be done will not be set out until the Spending Review.

Capital spending is also bound by the investment/debt fiscal rule, that public-sector net debt needs to be falling as a share of GDP by the third year of the OBR’s rolling forecast period. While the DIP has reallocated capital budgets from other departments to fund the investment, reaching the NATO target may well ultimately require tax rises and/or cuts to current spending.

For a “do no harm” Budget, there were a considerable number of measures announced – 98 in total. But nothing to materially move the dial.

While the Chancellor hiked taxes on a net basis for the year 2029-30 (when the fiscal rule needs to be met), he granted some near-term giveaways for both households and businesses wrestling with higher costs.

Revenue raising measures included an extra 2% tax on savings and property rental income in England, Wales and Northern Ireland from April, while the expected hit to banks came in the form of an extra 3% on the surcharge they pay on their profits (in addition to corporation tax). It is to double from 3% to 6% from January, but will be time-limited, expiring after fifteen months. This was somewhat less onerous than had been feared. Other measures included the perennial favourite of clamping down on tax evasion. Pleasingly from a pro-growth and investment point of view, mooted hikes to rates of capital gains tax did not materialise, and there was no mention of additional wealth taxes. 

Giveaways include another now-traditional Budget announcement, with the existing 5p fuel duty cut extended for another six months. Elsewhere, millions of households are to receive a £100 council tax rebate, and the 0% VAT rate on electricity bills is to be extended until July 2027. A green levy intended for hydrogen projects is to be removed from energy bills and absorbed into general taxation. The Chancellor also announced an increase to the threshold for small business rate relief for retail, hospitality and leisure businesses from £12,000 to £18,000 – expected to bring a tax benefit to some 70,000 small firms.

On devolution, the Chancellor set out a plan to direct business rate, and eventually income tax, revenues to mayors. A step on the way to the government’s stated aim of “fundamentally rewiring the state” by shifting power and funding from Whitehall to local leaders.

As has become well understood over recent Budgets, the Chancellor’s fiscal rules are twofold: to not borrow to fund day-to-day public spending (i.e. spending is covered by tax receipts), and to have debt as a share of UK GDP falling by the end of the current parliament in 2029-30. However, those commitments are based on assumptions and forecasts in the OBR’s periodic reports and dependent on both growth materialising at a certain level and tax receipts being fully realised – variables which no Chancellor controls. 

On the growth front, the Chancellor has recently come into some luck. The latest figures from the Office for National Statistics (ONS) showed the UK economy grew by +0.7% in the three months to August. The UK economy has shown itself to be somewhat more robust than previously expected, with Artificial Intelligence (AI) infrastructure spending cited as driving growth. Having previously suggested that the energy shock from the Iran war would hit the UK hardest amongst the world’s advanced economies, the International Monetary Fund (IMF) has since praised the UK's plans to shrink borrowing and commented that the UK was seeing “a bit of a better growth prospect" than other G7 nations.

The OBR now forecasts growth will be 1.2% in 2026, slightly stronger than previously expected, but only 1.0% in 2027, which is a material downgrade from earlier forecasts. Growth is then expected to recover gradually over the remainder of the forecast period, which extends to 2031-32. Inflation is predicted to average 3.1% this year and then 3.4% in 2027 – higher than previous forecasts – before declining towards the government's 2% target in 2028.

Realised rates of growth and inflation matter enormously for the public finances. Stronger economic growth increases tax receipts while reducing welfare spending, as earnings and employment rise. Conversely, weaker growth reduces revenues and makes it harder to stabilise debt. As noted, inflation can temporarily boost tax receipts – especially as frozen tax bands have seen higher nominal earnings dragging workers into higher tax brackets – known as fiscal drag. But it also increases government spending and leads to higher debt-interest costs. Debt interest spending is now forecast to be around £14bn higher this year than expected in the spring.

Ultimately, the growth outlook, higher inflation and elevated borrowing costs have weighed on the Chancellor’s fiscal headroom. Tax raising measures announced are forecast to outweigh spending increases, meaning some small fiscal consolidation to limit the hit, but the UK’s fiscal headroom has fallen to c.£15bn for 2029/30 – down from £23.6bn projected in March. For now, Healey has decided to let the headroom absorb the impact of higher borrowing costs. But it will limit the scope to absorb future bad news.

Annual borrowing was expected to fall significantly between last year and this year. Instead, it is now predicted to be close to flat, and higher than previously expected in every year of the latest forecast. Better growth and prior fiscal tightening mean that the deficit as a proportion of GDP is forecast to fall to 4.2% this year (from 4.3%) and reduce each year of the forecast to 1.8% in 2030/31. But this improvement relies heavily on the OBR's assumptions for future growth, inflation and planned spending restraint. If growth disappoints, inflation rises further, or departmental spending cuts prove difficult to deliver, the path for borrowing and debt could deteriorate. And regardless, the fact remains that the UK government will continue to spend more than it generates in revenue, meaning total borrowing will still increase. As with other developed market economies, there seems little political will to properly balance the books. That will surely have to happen at some point. With the UK government expected to issue c.£130 to £150bn worth of gilts per annum over the next five years – adding some £700bn of extra borrowing to the £3trn already outstanding – debating the merits of c.£10bn increased or decreased headroom every six months seems fairly trivial.

The 2026 Budget placated bond markets for now. Against a challenging economic backdrop, John Healey has managed to maintain fiscal credibility and provide some sought after “breathing space” for households and businesses. The approach is understandable when confronted with an exogenous shock like the Iran war.

But the likely reality is that he has bought himself some time, rather than implemented anything which might meaningfully address the UK’s longer-term fiscal challenges. Stronger economic growth is required if the government is to preside over an improvement in living standards and place the public finances on a more sustainable footing. A “fundamental rewiring of the state” is perhaps representative of the level of ambition required, but devolution alone is unlikely to bring the UK out of its prolonged growth malaise. Yet the Budget contained few measures which are likely to materially raise trend growth, productivity or investment. 

Moreover, the current fiscal plans rely heavily on very tight public spending settlements later in the OBR’s forecast period, which may well prove difficult in practice. Implementing the commitment to raise defence spending to 3% of GDP by 2030, as well as delivering real-term health care spending increases, means other government departments will face real-terms budget reductions if overall departmental spending is to remain within the limits set out in the latest forecast. Delivering such cuts could well see Healey fall foul of Labour party backbenchers. And Andy Burnham’s longer-term ambitions around matters like national social care are yet to be factored in. 

There therefore remains a risk that borrowing once again overshoots forecasts over the coming years. Experience suggests that future plans to squeeze departmental spending in later years of the forecast should be treated with a degree of caution. The Chancellor has chosen to leave addressing spending totals until next year's Spending Review. By that time the outlook for the economy could look somewhat different. Healey must hope it is for the better.

From an investment perspective, UK assets remain attractive despite the challenges. The UK’s fiscal troubles are far from the most acute amongst major developed market economies, and it does at least have a plan to plateau borrowing. The bond market could well direct its ire elsewhere. UK gilt yields remain attractive, with now higher yields offering a better buffer against further bouts of volatility, as well as an income which can be built-up or reinvested. Within equities, the UK market’s exposure to more cyclical sectors should benefit if the improvement in activity persists. Globally, the UK remains under-owned, which could provide opportunities to allocate to durable businesses at attractive levels. A sustained improvement in the UK outlook would be a welcome catalyst.

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