Budget balancing act leaves families braced for tough winter and four-year living standards downturn

Budget 2026 has attempted to balance the need for short-term cost of living support with a medium-term fiscal repair job. But badly targeted support with energy bills will leave families facing a tough winter, while big tax and spend decisions have been deferred until next year, and it will take until mid-2029 for household incomes to recover from the hit they’ve taken over the past two years, the Resolution Foundation said today (Wednesday).

Worrying global developments loom over the Office for Budget Responsibility’s (OBR) outlook. Borrowing is up by £11 billion a year on average (prior to the Chancellor’s policy announcements) entirely explained by higher debt interest costs.

Critically for families, prices are forecast to rise by 6.5 per cent over this year and next, compared to a forecast of just 3.9 per cent in March. The 2020s are now expected to bring twice the inflation of a normal decade, with prices rising by 43 per cent, compared to 22 per cent if inflation had stayed at its target 2 per cent.

The Chancellor has responded with a mid-table Budget that is the 19th biggest of the 34 fiscal events since 2010. Fresh policy changes are worth £7 billion in absolute terms by the end of the forecast – a far cry from the £72 billion average over the past two budgets.

The Chancellor’s temporary cost of living support package centres around three policies – the £2.6 billion Household Energy Payment, a short delay to Fuel Duty rises next year, and a three-month extension to the VAT cut on household electricity bills announced this summer. However, this package is badly targeted.

Delivering support with energy bills via a £100 rebate for those living in Council Tax bands A-D is near-universal, rather than well-targeted, with around four-in-five properties in England eligible for support. And yet despite this, around one-in-eight households in the bottom half of the income distribution live in higher band properties and are expected to miss out. Added to which, once again support is being delivered according to the value of properties in 1991.

One-in-five (20 per cent) households in London and the South East in the bottom half of the income distribution live in homes in Council Tax bands E and above and so will not receive this support, compared to one-in-twenty (5 per cent) in the North East, North West, and Yorkshire and The Humber.

This package will literally be cold comfort for households. Big jumps in energy prices mean bills are set to average £2,210 across 2027 – an increase of £600 (or 38 per cent) on the 2026 average. Support of up to £116 announced today will alleviate less than a fifth of this coming rise in bills. A properly targeted scheme, which the Government has had ample time to build, could have provided twice the level of support for lower-income households at the same cost.

The Chancellor’s decision to delay the rise in Fuel Duty is perhaps inevitable given the recent increases in the costs of petrol and diesel. But the now scheduled 7.6p rise next July lacks any credibility, especially given successive governments’ continuing cowardice on Fuel Duty uprating. Had Chancellors actually delivered planned rises over the past 15 years, they could have raised around £20 billion a year – enough to cut employee National Insurance by 2p.

The Chancellor has borrowed to fund temporary support this year. The permanent revenue raisers, such as increasing tax rates on savings and property income by 2 percentage points, are sensible and will reduce the ‘income tax gap’ that penalises employees over those who draw income from other sources.

The fiscal repair job will be carried out more slowly than previously planned. Although the Chancellor’s decisions reduced borrowing in 2029-30, the key year for the fiscal rules, they have raised total borrowing over the next five years – by an average of £2 billion a year. Combined with economic news, this leaves borrowing higher in every year than forecast in March, by an average of £13bn. And the £14.5bn headroom left in 2029-30 represents less insurance against uncertainty than the previous plans.

Given the typical gap between plans and outcomes outside of major shocks, the current budget could turn out to be £26 billion in deficit in 2029-30. Indeed, the cost of government borrowing continued to rise after the OBR closed that forecast – and the peak of recent weeks would imply about £2 billion of extra debt interest costs above and beyond the revisions today.

The Chancellor made some welcome moves on the UK’s longer-term challenges of boosting investment. The £20.4 billion added to the National Wealth Fund and British Business Bank is around enough for their annual investment commitments to match the funding lost from the European Investment Bank Group after the UK left the EU.

But today’s Budget may well be remembered for what isn’t in it, rather than what was. Key decisions about public services funding have been deferred until the Spending Review next year. As it stands, unprotected departments like Justice, Transport and Work and Pensions look set to face challenging real cuts worth 6.7 per cent – or £12bn in total – between now and the end of the forecast.

The OBR forecast shows that Britain is in the midst of a living standards crunch. Real household disposable income (RHDI) per person is currently £420 lower than they two years ago, an amount they won’t recover from for another two and half years (April 2029).

As a result, the medium-term prospect for family living standards is dire. Incomes are set to rise by an average of just 0.6 per cent a year (or £776 in total) over this Parliament, making it the second worst for living standards since the 1950s (and after the last one, when incomes fell by -0.4 per cent).

Ruth Curtice, Chief Executive at the Resolution Foundation, said:

“Conflict in the Middle East and global economic turmoil have brought higher inflation and borrowing costs to Britain, challenging the Chancellor to deliver a delicate balancing act of providing cost of living support while keeping borrowing down.

“The Chancellor has missed the mark with badly targeted support that has left families facing a tough winter as energy bills rise. It is also questionable whether the tight public spending plans required to meet his fiscal rules will survive reality.

“The small tax measures announced today are sensible, but the opportunity to fix our broken tax system has been missed again. None of what was announced today is likely to shift the dial on what is set to be a truly terrible decade for living standards.”

Notes to Editors