Budget will ease cost of living pressures next year – but backloads fiscal repair job to eve of next election 26 November 2025 The Chancellor has moved decisively to ease cost of living pressures with welcome support on energy bills and for larger families. She has also increased her fiscal wiggle room, funded by the expected freeze in income tax thresholds and sensible reforms that help to level the playing field on personal taxes. But this backloaded Budget means tax rises and spending cuts are coming just before the next election, the Resolution Foundation said today (Wednesday). The backdrop to the Budget run-in has been warnings of a bleak economic outlook. The Office for Budget Responsibility (OBR) did make the 0.3 percent expected downgrade to productivity in 2029-30, increasing borrowing by £16 billion, but this was offset by other improvements in the forecast. The resulting £5.5 billion deterioration (in the crucial year of 2029-30) was much smaller than the average forecast move of £21 billion since 2010, and allowed the Chancellor to more than double the low financial buffer against her fiscal rules to £22 billion. However, the £7 billion cost of recent policy U-turns and the sensible desire to increase her fiscal headroom necessitated significant fiscal consolidation. Delivering significant tax rises is no easy task, but the Chancellor has now managed £68 billion of tax rises in her first two Budgets – the biggest double whammy from a newly elected Government, even beating the £63 billion of tax rises in 1993. The biggest single measure was the favourite tax-raising lever of the previous government: freezing personal tax thresholds. The latest three-year extension to Income Tax and National Insurance thresholds will cost the average pensioner £160 a year in 2030-31, a typical employee £220, a higher earner £660, and a very high earner £440. Very high earners are affected less because they already have no personal allowance. This so-called ‘stealth tax rise’ will now run for nine years, raising a total of £67 billion by 2030-31 and costing the typical worker on £35,000 around £1,400 in that year. However, the Personal Allowance will still be over £1,300 higher in real-terms in 2030-31 than it was in 2010-11, and for many the National Insurance rate cuts of 2024 will outweigh the threshold freeze. The rest of the package is a patchwork of smaller but broadly sensible tax rises. The Chancellor has taken welcome steps to level the playing field on personal tax by reducing the under-taxation of income from dividends, savings and property, and modernising road taxes with a mileage charge for Electric Vehicles. Losses from these reforms are likely to be concentrated among relatively few, high-income households. For example, half of households affected by the Mansion Tax are in the richest tenth of households, and the vast majority (around 90 per cent) will be in London and the South East. The Chancellor has taken decisive action to ease cost of living pressures. The scrapping of the two-child limit will lift around 450,000 children out of poverty by 2029-30 – a much-needed change given that benefit claiming families with three or more children have lost an average of £4,600 per year in 2024-25 due to benefit changes since 2010. The Government has also acted on three cost of living bugbears: petrol prices, rising rail fares and energy bills. A typical family will gain £234 in 2026-27 from energy support and fuel duty measures announced at this Budget, while CPI inflation in Spring 2026 is forecast to be 0.5 percentage points lower. But this was a backloaded Budget. Half of the Government’s energy bill package is only in place for three years, with £55 set to be added back onto electricity bills in 2029-30. Some of the more controversial tax rises – including the £4.7 billion cut to salary sacrifice and Mansion Tax – are coming into effect in 2028-29. Overall, the Chancellor’s decisions today increased borrowing by £1 billion on average in the first three years of the forecast (2026-27 to 2028-29) versus savings of £24 billion on average in the final two (2029-30 to 2030-31). This, alongside a forecast that deteriorates more at the start than at the end, leaves the public finances getting worse before they get better – with borrowing higher than this March in every year until 2029-30 and the level of debt higher throughout the forecast. And it leaves the Government set to phase out cost of living support, implement significant tax rises and cut public services ahead of the next election. Stepping back, compared to the plans of the previous government, the Labour government have increased taxes (in 2028-29) by £56 billion. This has been spent on increases in day-to-day spending of £46 billion and additional welfare spending £3 billion. Labour have also increased investment by £30 billion, leaving borrowing £48 billion higher (after taking account of the effects of tax and spending decisions on the economy). And overall, while the forecast was better than expected for the Chancellor it had bad news for households. The outlook for living standards has worsened – with real disposable incomes rising by a paltry 0.5 a year over the Parliament – the second worst since records began in the 1950s. And while many will focus on rising taxes, an ever greater concern for living standards is the projected rise in unemployment. Ruth Curtice, Chief Executive at the Resolution Foundation, said: “The Chancellor has used her Budget to ease cost of living pressures and firm up the public finances by more than doubling her fiscal headroom. She has achieved this by extending Britain’s biggest stealth tax rise – which will raise £67 billion by the end of the decade – and a series of small but sensible tax reforms. “This Budget acts decisively on the cost of living – cutting energy bills and lifting almost half a million children out of poverty. “The Chancellor has also taken welcome steps to level the playing field on personal tax, and to future-proof our tax base by bringing electric vehicles into road taxation. But the bias of our tax system against payrolled work remains at a record high. “This Budget leaves much of the fiscal repair job to 2028 and beyond. Economic winds could change dramatically between now and then. The Chancellor has taken the sensible step to increase her wiggle room at the start of the Parliament but the effects will be felt at the end.” Notes to Editors A typical family will gain £234 in 2026-27 from energy support and fuel duty measures announced at this Budget: £127 of this is from energy, based on policy discounts for the Ofgem typical household, and £107 from fuel duty changes based on £89 per car (HMT figure) and average of 1.2 cars per household (National Travel Survey).
