The Chancellor must balance support for struggling families at the Budget with the need to rebuild confidence in the public finances as headroom halved to £12 billion 13 October 2026 Conflict in the Middle East has left a huge hole in the UK public finances, halving headroom against the Chancellor’s binding fiscal rule to £12 billion. John Healey must respond with a Budget that repairs the damage to our public finances while also providing well-targeted support for lower income families, the Resolution Foundation said today (Tuesday). The report Hitting the Buffers, funded by the Nuffield Foundation, says that the economic backdrop to Budget 2026 is looking perilous despite the fastest growth in the G7 in the first half of this year. Conflict in the Middle East has hit the public finances by raising borrowing costs, and hit family finances too by pushing up inflation, especially energy bills. The Foundation estimates that higher debt interest costs alone are likely to increase borrowing by around £14 billion a year in 2029-30 – the crucial year for the Government’s fiscal rules – though the impact of higher inflation, wages and equity prices in raising tax revenues will offset some of this additional borrowing. Upward pressure could potentially come from a downward revision to migration, which could increase borrowing by as much as £5 billion. Overall, the Foundation notes that the Chancellor’s headroom against his fiscal rules is likely to have roughly halved from £24 billion in the spring to as little as £12 billion at the Budget. With markets scrutinising the fiscal positions of countries around the world, the Foundation says that the Chancellor should demonstrate his commitment to fixing the public finances with a Budget that restores headroom of at least £20 billion. Fiscal consolidation is also needed given uncertainty over how new spending commitments will be financed, including the £10 billion required to raise defence spending to 3 per cent of national income. But the challenge of continuing to bring down borrowing must be paired with the pressing need for fresh cost of living support to help families facing a difficult winter ahead, as the energy price cap rises to around £2,000 this January. The Chancellor should heed the lessons of the cost of living crisis, avoid wasteful universal support and instead provide targeted help to those struggling to heat their homes. A new temporary scheme targeted at those with an income of below £24,000 would extend beyond benefit recipients, save eligible households £175 on average, and cost £2 billion overall. Another cost of living crunch is taking place in the private rented sector, where support for tenants has been frozen while rents have increased by more than 20 per cent, equivalent to nearly £160 a month for a modest two-bedroom home. Restoring the link between local rents and support would help over 900,000 households at a cost of £2.3 billion and can be funded, if necessary, within the Universal Credit budget by increasing the taper rate. The Chancellor will need to combine surgical precision on cost of living support with spending restraint and smart tax reforms if he’s to fix the public finances. While there are potential savings from disability benefits, reforms must not be rushed and so cannot be made in time for the Budget. Instead, new commitments – like those on teachers’ pay and tackling homelessness – should come from within existing public service budgets. To really deliver credibility, though, the Chancellor will need to not just make the numbers add up in a spreadsheet but tell us his plans for tax and spend over this Parliament. That means setting the total envelope and a timetable for the spending review due in 2027, including whether further increases to pay for defence are needed, and how they will be paid for. One option to pay for a significant increase would be to switch 2p of National Insurance onto Income Tax – a move that would protect working people while raising £6 billion. James Smith, Chief Economist at the Resolution Foundation, said: “Strong data over the summer on economic growth and productivity could have made for a honeymoon Budget this autumn. Unfortunately, the conflict in the Middle East has thrown all of that out of the water and landed the Chancellor with a tough first act. “War in the Middle East has likely halved the level of headroom he has against his fiscal rules. And with markets closely scrutinising our fiscal position, he will need to deliver a robust Budget to show he’s serious about sound public finances. Families too will be listening carefully to news of help with their energy bills this winter. “The Chancellor may hope to get through the Budget with fresh cost of living support and his fiscal rules intact. But to truly stem uncertainty, the Chancellor needs to reassure financial markets that he is willing to face reality rather than duck it by setting out his approach to tax and spend over the remainder of the Parliament.” Alex Beer, Assistant Director of Strategy at the Nuffield Foundation, said: “The conflict has worsened the UK’s short-term economic outlook, adding to pressure on the public finances while increasing costs for families through higher energy bills and wider inflationary pressures. “This report – part of our wider programme of Nuffield Foundation funded research into the consequences of the Iran-US conflict – highlights the difficult balance between supporting households facing the greatest financial pressures and restoring public finances, underlining the importance of measures that are carefully targeted and responsibly funded.” Notes to Editors Embargoed copies of Hitting the Buffers by Hannah Aldridge, Matthew Cavanagh, Nye Cominetti, Ruth Curtice, Zachary Leather, Jonathan Marshall, Cillian Sheehan and James Smith are available from the press office. This project has been funded by the Nuffield Foundation’s UK impacts of the US-Iran conflict fund, but the views expressed are those of the authors and not necessarily the Foundation. The Nuffield Foundation is an independent charitable trust with a mission to advance social well-being. It funds and undertakes rigorous research, encourages innovation and supports the use of sound evidence to inform social and economic policy, and improve people’s lives. The Nuffield Foundation is the founder and co-funder of the Nuffield Council on Bioethics, the Ada Lovelace Institute and the Nuffield Family Justice Observatory. Find out more at: www.nuffieldfoundation.org. Bluesky: @nuffieldfoundation.org, LinkedIn: Nuffield Foundation
