Budget 2026 special

Afternoon all,

While Wednesday’s Budget might have been a more modest affair than we’ve become accustomed to, RF staff were still crunching the numbers late into the night, soundtracked by Treasury officials cheering on the Chancellor for downing a pint getting through his first Budget. Instead of taking Friday a little easier, we’re still here to bring you bonus content.

Overall, this scattergun Budget did not rise to the scale of the challenges facing Britain. We need more than £100 to the wrong people in the face of another energy price shock, and a forecast for falling living standards over the rest of the Parliament. Read on for five brand new scary charts fit for Halloween: from why things have already got worse, to why it (actually) isn’t all about economic growth.

That said, there were things to welcome this week. A sensible decision on minimum wage, worthwhile reform in closing the gap between tax rates on savings and property income with those on wages, and money to help the PuFiNs fly.

The stage is set for the true reckoning of priorities in 2027 – but first, sleep.

Have a good weekend,

Ruth

Do you feel lucky punk?

One of the Chancellor’s big choices was to use some of his insurance policy (letting the current budget that he has promised to balance fall from £24bn to £15bn). If things turn out better than expected this will prove a wise move. So far, however, it looks like the Chancellor’s chips are down. The OBR took economic data up to mid-August into account in its forecast. By Budget day, gas prices were far above the OBR’s central forecast and looked dangerously close to its “severe” shock scenario, while oil had climbed two-thirds of the way there. On energy prices, the OBR’s downside scenario is starting to look like the central case (though at our event this week Haskel explained that how long high prices are sustained for will be crucial). In that scenario, inflation tops 5 per cent next year. But the Government does get a sliver of good news. Although the severe scenario does show higher borrowing overall, that’s entirely down to a one percentage point rise in gilt yields that has not yet materialised. So while households are facing something like the severe scenario, the Treasury (for now at least) is not.

Shrinking ambitions.

One bit of good news the OBR didn’t have time to incorporate was the continued resilience of the UK economy in July and August. And there were 34 pages of the red book dedicated to a plethora of measures aimed to continue to boost economic growth. My favourite was topping up the National Wealth Fund and British Business Bank by a combined £20.4 billion (as we’ve been calling for). But at the same time, the Government’s ambitious plans for higher investment have again been chipped away at. Capital departmental spending (CDEL) is now set to fall to 4.1 per cent of GDP in 2029-30, down from 4.3 per cent in the March forecast. The exception is defence investment, thanks to the Defence Investment Plan. Take that out, and we’re actually planning to invest less than we did in 2023-24: CDEL excluding defence has lost over £5 billion since the March forecast. While it has other important aims, defence CDEL is less likely to boost economic growth than other categories like transport or energy, both of which are set to shrink.

Marching to Milburn and Tiptoeing to Timms

Despite there being very little about social security in this Budget, welfare spending dominated the headlines the following day. Two ongoing reviews may prove more memorable than this Budget: Milburn on young people and Timms on disability benefits. For the decade following the pandemic, almost all of the rise in welfare spending is from two sources – benefits for pensioners (£37 billion) and working-age health and disability benefits (another £37 billion). The Prime Minister deserves credit for his boldness on moving away from the triple lock which in the long run will put the first on a more sustainable trajectory; even if on Wednesday the OBR scored the princely sum of zero for savings from it in the first year. The combined response to Milburn and Timms will presumably aim to address the second. The total spend on young people neither earning nor learning runs to around £4 billion, while working-age disability spending in England and Wales stands at nearly £28 billion. Milburn may be more of a headline grabber, but addressing the drivers of higher ill-health and disability across all age-groups remains highly consequential for the public finances as well as living standards.

Shooting in the dark.

Families are on track to pay much higher energy bills this year than last. The left panel below shows how unevenly that increase is set to land: up £217 in 2026-27 for the typical household (compared with 2025-26). But there is as much variation between households with the same income as between households of different income. Within every income bracket many households face very large rises, with around one-in-five of the poorest households facing increases of more than £300. This is why help needs to reach those with both low incomes and high energy use.

The Chancellor’s main response, a £100 Household Energy Payment for homes in Council Tax bands A to D, does neither. As the right panel shows, eligibility barely varies across the bottom three quintiles and remains high even at the top, where three-in-five households qualify. A £100 bung to everyone means giving it to many people who don’t need it – either because they are on high incomes, fixed rate tariffs, or have low energy needs. This scatter-gun approach will provide little comfort for many of the one-in-six of the poorest families who already tell us they can’t afford to heat their homes.

A lost decade.

The most disappointing thing about this Budget was what it told us about the long-run prospects for living standards. Real household disposable income per person is set to grow by just 0.1 per cent a year on average between 2019 and 2029, compared with 0.9 per cent between 2007 and 2019 and 2.4 per cent in the decade to 2007. TOTC readers will no doubt be familiar with the role economic growth (the blue bars) played in our post financial crisis disappointment. That it’s become relatively more expensive to buy things from the rest of the world (the yellow bars) also matters. But the 2020s squeeze on living standards has a new source (the red bar in the chart below): net taxes and benefits, which added to income growth after the financial crisis, are now a drag on it.

This is not really a story of consolidation – borrowing in 2029-30 is forecast to be little lower than it was before the pandemic. Over this period, taxes are up to pay for higher spending, with health spending, in particular, 1 percentage point higher as a share of the economy. Especially painful is spending an extra 2.4 per cent of GDP on debt interest.

This final chart sums up the dilemma the Chancellor has put off but cannot avoid in 2027. If we cannot afford the public services and defence we want without a bigger red bar – will he choose to disappoint on those or to squeeze household incomes even further?