Healey’s fiscal ‘dilemma’ ahead of the Budget
Seven Lights
With the Budget a week away, the headquarters of the Office for Budget Responsibility — the independent fiscal watchdog, sitting in a small office at the top of the Ministry of Justice building — is likely to be buzzing with staff members double-checking details and estimates in its crucial economic and fiscal outlook that determines whether the Chancellor has a grip over public finances, City A.M. reported.
Earlier data had offered some grounds for optimism, according to City A.M.: the unemployment rate fell to 4.7 per cent, defying expectations, while wage growth inched higher, likely boosting projected income tax levels, and consultants at EY said a faster drop in unemployment could deliver the Chancellor billions more in extra receipts. Former Goldman Sachs economist Jim O’Neill has suggested that budding productivity data over the last two years indicate the UK could be returning to growth of around two to three per cent, the outlet said.
On Wednesday, City A.M. reported, those rising hopes came crashing down: in a double blow, inflation rose higher than expected and government borrowing overshot the OBR’s forecasts for September. UK inflation accelerated from 3.1 per cent in the year to August to 3.5 per cent in the year to September, pushed up by sharp increases in petrol and diesel prices, the BBC reported — the highest since October 2025, according to the Office for National Statistics. The BBC attributed part of the rise in fuel costs to disruptions to global oil supplies amid conflicts in the Middle East and Europe.
Government borrowing jumped to nearly £25bn in September — £24.5bn, £1.8bn higher than a year earlier — putting borrowing for the financial year to date £6bn above official forecasts, the BBC reported. UK debt has also surpassed £3 trillion for the first time, City A.M. reported: it took around 10 years for debt to rise from £1 trillion to £2 trillion between February 2010 and June 2020, and another six years to add the next trillion after £385bn of pandemic spending and extra borrowing to support households after Russia’s full-scale invasion of Ukraine. Debt as a share of economic output has fallen slightly over the last 12 months, both outlets noted.
Analysis by the Resolution Foundation cited by City A.M. showed that receipts were nine per cent higher than the same month last year, running above OBR forecasts, while the government is spending more than it would like, primarily on welfare and on covering debt. Greg Thwaites, interim chief economist at the think tank, said Healey faced a “dilemma” given public pressure to top up support for some families struggling with higher energy prices, and called for any new spending package at the Budget to be “targeted,” according to City A.M. Ruth Gregory of Capital Economics said the borrowing figures “painted a dismal picture,” the BBC reported.
Debt interest costs hit £10.9bn in September, a rise of around 17 per cent on the previous year and about £2bn above the OBR’s forecast, City A.M. reported, attributing the increase to a spike in gilt yields following the eruption of conflicts involving Iran in the Middle East: ten-year gilt yields rose from around 4.2 per cent to nearly 5.5 per cent over seven months. City economists have widely predicted that the Chancellor’s headroom against his main fiscal rule — that day-to-day spending should match tax receipts by 2030 — has dropped from over £23bn to about £12bn, the outlet said.
Healey has promised a Budget that keeps to Labour’s commitment not to hike income tax, National Insurance and VAT while sticking to the party’s fiscal rules, and said the Budget on 28 October will “keep up this momentum” and drive “growth in every postcode,” the BBC reported. Shadow Chancellor Andrew Griffith said the higher inflation and borrowing showed Labour had “lost control of the economy,” according to the BBC.