Burnham’s Budget Offers Peanuts to Hard-Pressed Brits
The Labour government has decided to continue kicking the fiscal can while offering party favors to voters.
That famous fiscal can that has been kicked down the road by successive UK chancellors, Labour and Conservative, is getting pretty battered. Wednesday’s budget from the shiny new Chancellor John Healey has given it one of the biggest drop-kicks yet. The bottom line is that nothing has been done to address the UK’s unsustainable financial position.
Let’s take a look at borrowing. Britain will spend more than twice as much on interest on the UK’s £3 trillion debt as it currently does on defence: £147 billion in fiscal year 2029–30. This can’t go on. Everyone says so, even the government. Healey gave no indication of how he intends to make progress toward spending the promised 3.5 percent of GDP on defence by 2035.
But painful adjustments are being deferred yet again. Today, the independent Office for Budget Responsibility (OBR) says that, following the chancellor’s statement, projected government borrowing in 2026–27 is £17.7 billion higher than it forecast just in March!
Welfare, as this column has pointed out, now costs more than the entire revenue from income tax. It will rise by an unsustainable £100 billion over the next six years, from £333.8 billion today to £431.3 billion. Prime Minister Andy Burnham promised to rein in the welfare bill, but apparently in a parallel universe.
The chancellor claimed that he has stuck to the Labour manifesto pledge not to raise income tax. But he knows this is not true. By keeping frozen the roughly £50,000 threshold for higher-rate tax, more than 580,000 additional people will be paying 40 percent income tax next year rather than the standard 20 percent rate. Overall, by the time the threshold is expected to rise, upwards of five million people, including nurses, teachers and police officers, will have been dragged into a tax band that is supposedly only for the rich.
This fiscal drag really matters because living standards in Britain have tanked in recent years. Unlike in the vast majority of OECD countries, average pay more or less flatlined between 2008 and 2025, the longest pay freeze since the Napoleonic Wars. And things are not going to get much better. Indeed, according to the OBR, real household incomes are falling again and will not fully recover before 2030. UK growth is forecast to fall to 1 percent next year.
To address this cost-of-living crisis, as it is called, the chancellor has tossed a handful of what can only be described as fiscal peanuts before the scrabbling British electorate. There will be a £100 cash payment (shades of Donald Trump) to 20 million households. This is to be paid for by British banks paying an extra 3 percent on the corporation tax surcharge. Landlords will pay an extra 2 percent on income from rents.
VAT has already been cut on domestic fuel bills, and there will be a continued freeze on the duty paid on petrol and diesel, which already costs around £2 a litre in the UK (that’s 58 percent more than in the U.S.). Oh, and import taxes are to be removed on 100 food products—including, we are promised, gherkins, presumably to go with the peanuts. This is going to be a hard winter for many, with inflation rising to 3.75 percent, nearly twice the Bank of England’s 2 percent target.
Domestic heating bills are increasingly unaffordable in the UK. The cap on average household bills is expected to rise from around £1,700 now to £2,000 if not higher in January. Twelve million Britons are already in what is called “fuel poverty,” meaning that they spend more than 10 percent of their after-tax income on gas and electricity.
Energy is at the root of Britain’s economic malaise. Businesses pay some of the highest industrial electricity costs in the world, four times those in the U.S. No modern economy, certainly in the age of AI data centres, can survive such ruinously high energy costs. These have largely been the result of the UK’s quixotic pursuit of net-zero emissions.
Britain closed its coal-fired power stations years ago, yet competitor countries such as India and China are still opening new ones regularly. Green energy, mainly from offshore wind, was supposed to deliver cheaper British energy than coal or gas. It has not happened.
This is largely because of the cost of subsidising the renewables industry, mainly by giving it index-linked guarantees of high prices, called “contracts for difference.” Tens of thousands of green jobs were supposed to replace those lost in the oil and gas industry, but these have not yet materialised. Britain hasn’t opened a nuclear power plant since Sizewell B in 1995.
The back story to this budget is that the Burnham government has belatedly realized that energy policy is going to have to change. It has given the go-ahead for the long-delayed Jackdaw gas field off Aberdeen and is expected soon to give the green light to the Rosebank oil and gas field off Shetland. Indeed, the revenues from it are already being included in the national accounts by the OBR.
The former Secretary of State for Energy Security and Net Zero Ed Miliband said that opening these fields would amount to “climate vandalism.” It is pretty clear why he had to be moved in Burnham’s first cabinet reshuffle. Miliband, who has the support of many Labour backbenchers, could not have remained in post had drilling resumed.
Whether Burnham will go the extra mile and slash the 78 percent profits tax rate on energy companies developing the North Sea remains to be seen. But it seems as if the UK government has realised that it cannot pursue net zero at the expense of the economy.
Nor can it ignore public opinion. This was a chicken-feed budget offering next to nothing to hard-pressed families. The Labour government has looked at Britain’s debt problem and decided that now is just not the time to address it. Meanwhile, British voters are beginning to realize just what it means to live in a country that is performing less well in terms of GDP than some of the poorest states in the U.S.
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