Healey's First Budget: £1.42tn Spending, Bank Levy, Tight Headroom

By Daniel Okafor

Chancellor John Healey will allocate about £1.42tn this year on day-to-day spending and public investment in his first budget on Wednesday, and roughly £100bn of it will go straight to debt interest. The budget will set the tone for Andy Burnham's premiership. Despite Healey's summer promises that the event would not suffer the leaks that plagued his predecessor Rachel Reeves, both official and unofficial sources have already laid out most of what he plans to announce.

How much money does the chancellor actually have?

Not much spare. The interest rate the government pays has risen to multidecade highs. Healey blames most of the increase on the Gulf conflict launched by the US and Israel at the end of February, which pushed oil above $110 a barrel and gas prices to levels not seen since late 2022.

Borrowing has fallen compared with 2025-26, but not by as much as the Office for Budget Responsibility estimated in March. Higher debt financing means Healey is spending about £1bn a month more than forecast.

The Resolution Foundation thinktank says the £24bn buffer built up in the last tax-raising budget has likely halved to £12bn. Economists at ING say the Treasury would prefer headroom of about £15bn. That squeeze lands while Healey needs cash for cost-of-living measures, higher defence spending and the prime minister's priorities, such as devolution.

What does he want to spend money on?

Healey has promised to give consumers and businesses "breathing space." The package includes:

• Parental pay: an extension to more than 150,000 additional parents per year, worth £388 each, including self-employed fathers and partners who previously missed out.
• Carer's allowance: the cliff-edge ends, so unpaid carers no longer lose more than their allowance once they hit the weekly earnings limit.
• Import tariffs: removal on more than 100 products, including baked beans, chocolate and gherkins, to cut shop prices.
• Energy bills: more than £1bn for poorer households, mostly expanding the Warm Home Discount. An additional £100 could be added to the existing £150 means-tested rebate, funded by taxes rather than billpayers.
• Standing charges: Burnham has already suspended VAT on electricity bills for six months and asked the Treasury to explore abolishing standing charges on gas bills. Those charges are now expected to disappear.
• First-time buyers: more detail on the "your first home" scheme, first announced at Labour's conference last month. The revamped version of the Tories' "help to buy" offers a 20% equity loan on a new-build, an initial interest-free period and a minimum deposit of 2.5%.
• Defence: Healey aims to plug a £4.7bn gap in the defence investment plan inherited from Keir Starmer, with cuts to other departmental budgets likely to fund it. A roadmap for reaching 3% of GDP by 2030 will not come until next year's spending review — even though Healey resigned in June over that very target.

Which taxes could rise?

Healey cannot raise income tax, national insurance or VAT rates without breaking manifesto commitments, and he has promised to stick to Reeves's fiscal rules and not borrow for day-to-day spending. The revenue options left:

• Bank levy: The Guardian revealed this month that the budget's main revenue-raiser is expected to be a levy on banks. The sector's resistance has weakened after a run of bumper quarterly profits on higher interest rates, capped by HSBC's Tuesday announcement that profits rose 32% to about £7.2bn. Jeremy Hunt cut the bank surcharge from 8% to 3% before the last election; reversing that would raise more than £2bn a year.
• Online sellers: Labour backbenchers and unions have lobbied hard to raise taxes on marketplaces such as Amazon and eBay. Former Burnham adviser Andy Haldane used a Guardian interview to urge Healey to "level the playing field" with physical stores. One proposal would raise up to £1bn by forcing marketplaces to collect VAT for large-scale UK-based sellers as well as overseas ones. That money could fund a business-rates cut for small high-street shops, possibly by raising the payment threshold from £12,000 to £18,000 — supporting the "bloody-minded entrepreneurs" Healey says he wants to back.
• Alcohol duty: likely to rise with RPI inflation, lifting the tax on a pint from 50p to 52p.

What will he leave alone?

• Mansion tax: Treasury officials have played down speculation of significant changes to Reeves's annual charge of up to £7,500 on properties above £2m from April 2028. Healey considered lowering the threshold to £1.5m, but London MPs pushed back and are confident he has dropped the move.
• Capital gains tax: Healey has rejected calls from senior Labour MPs to align CGT with income tax rates, despite cabinet colleagues favoring equalization. Former Treasury minister Jim O'Neill argued it would harm incentives for wealth creators.
• Fuel duty: due to rise 3p a litre in January and 2p in March, with an RPI-linked increase defaulting from April. With petrol and diesel near record highs, Healey is expected to extend the freeze. The Institute for Fiscal Studies says a one-year extension could cost up to £2.7bn; holding it to 2029-30 would cost another £4bn.
• Inheritance tax: Conservative leader Kemi Badenoch has proposed raising the tax-free threshold from £325,000 to £500,000 and excluding family homes. Labour is expected to propose nothing.

What else is in the package?

Devolution gets real money. Healey will offer a £150m funding boost to help mayoralties and local authorities scale up, plus a £1.5bn borrowing facility and an initial £285m of "good growth" funding next year for local leaders' priorities — housing, transport links or high street regeneration.

Golden visas are out. Healey has scrapped plans, explored by the Treasury earlier this year, for a new visa route aimed at wealthy people from overseas.

With a £12bn buffer, manifesto tax locks and a £4.7bn defence hole, the bank levy and the online-seller VAT plan carry most of the budget's arithmetic — and how far they stretch will define Burnham's first year.