BIZ-OMICS · Budget 2026 Decoded — Healey’s first Budget · A-Level Economics    Name: ______________________ Class: ________ Date: ________
Economics in the Real World · Budget special

Budget 2026 Decoded

John Healey’s first Budget as Chancellor, delivered on Wednesday 28 October 2026. What does a Chancellor actually do, what did this one decide, who wins and loses — and could you have done better?

A-Level Economics Fiscal policy · Supply-side · Equity AQA · Edexcel · OCR
Chancellor John Healey holding the red Budget box outside 11 Downing Street
Chancellor John Healey with the red Budget box, Budget Day 2026.
Status: built on Budget Day from the Chancellor’s speech and live coverage. Updated with the OBR’s Economic and fiscal outlook (October 2026), including its costings of each measure, and KPMG’s analysis. A few details that come only from pre-Budget briefings are flagged in the text.
Section 1

What does the Chancellor do?

The Chancellor of the Exchequer runs HM Treasury, the government department that controls the public finances. If the Prime Minister sets the direction of the government, the Chancellor decides how it is paid for. The Chancellor lives at No. 11 Downing Street and holds the formal title of Second Lord of the Treasury (the Prime Minister is First Lord).

💷 Sets fiscal policy

Decides the level and structure of taxation and the overall total of government spending — the main tools of fiscal policy.

📕 Delivers the Budget

The main annual “fiscal event”, now held in the autumn. Tax changes are made law through a Finance Bill voted on by Parliament.

🏛️ Runs the Spending Review

Allocates multi-year budgets to each department (health, schools, defence), known as Departmental Expenditure Limits.

📏 Sets the fiscal rules

Self-imposed targets for borrowing and debt, written into the Charter for Budget Responsibility and approved by Parliament.

🏦 Writes the Bank’s remit

Sets the Bank of England’s inflation target (2% CPI) each year — but does not set interest rates. That job belongs to the independent Monetary Policy Committee.

📈 Manages government debt

Oversees borrowing through the sale of gilts (government bonds) by the Debt Management Office, and the stability of the financial system.

Meet the Chancellor: John Healey

  • Appointed Chancellor on 20 July 2026 by new Prime Minister Andy Burnham.
  • Previously Defence Secretary from the 2024 general election until June 2026 — unusual preparation for the Treasury.
  • MP since 1997 (now Rawmarsh and Conisbrough, South Yorkshire), and a junior Treasury minister in 2005–07.
  • Pledged to stick to the fiscal rules inherited from his predecessor, Rachel Reeves.
  • Billed his Budget as giving households “breathing space today”.
Tell me why… a new Chancellor might want to keep his predecessor’s fiscal rules, even if he disliked them.
Credibility. Gilt investors lend to the government based on trust that borrowing is under control. Changing the rules soon after arriving looks like moving the goalposts, which can push up gilt yields — raising the cost of all government borrowing. The 2022 “mini-budget” showed how quickly markets punish a loss of fiscal credibility.
Tell me why… the Chancellor does not set interest rates.
The Bank of England was made operationally independent in 1997. Politicians face a temptation to cut rates before elections to create a short-term boom (a “political business cycle”). Handing the decision to independent experts makes the inflation target more credible, which helps anchor inflation expectations.

Budget Day in six steps

  1. The forecastThe independent Office for Budget Responsibility (OBR) prepares its economic and fiscal forecast, and scores the cost of each Treasury policy.
  2. The red boxThe Chancellor poses outside No. 11 holding the red despatch box containing the speech — a tradition dating back to Gladstone in the 1800s.
  3. The statementAfter Prime Minister’s Questions, the Chancellor delivers the Budget speech to the House of Commons, usually lasting about an hour.
  4. The replyBy convention, the Leader of the Opposition (not the shadow chancellor) responds immediately.
  5. The documentsThe Treasury publishes the Budget “Red Book”, and the OBR publishes its Economic and Fiscal Outlook with its verdict on the fiscal rules.
  6. The lawMPs vote on Budget resolutions; the tax measures then pass through Parliament in the Finance Bill.

Who does what? Treasury, Bank and OBR

InstitutionMain jobPolicy toolsIndependent of government?
HM Treasury (Chancellor)Manage the public finances; promote growthFiscal policy (tax, spending, borrowing); supply-side policyNo — part of government
Bank of England (MPC)Price stability: hit the 2% CPI targetMonetary policy: Bank Rate, quantitative easing/tighteningYes — operationally independent since 1997
Office for Budget ResponsibilityForecast the economy and public finances; judge the fiscal rulesNone — it advises and scrutinisesYes — created in 2010
Tell me why… the OBR exists at all.
Before 2010, the Treasury produced its own forecasts — and Chancellors had an incentive to make them optimistic so their plans looked affordable. The OBR gives independent forecasts and checks the cost of each policy, which makes the government’s fiscal plans more credible to voters and to the gilt market.
Section 2

The Chancellor’s problem

Healey had very little room for manoeuvre. Three pressures squeezed him at once:

🌍 An external shock

Market turmoil and higher energy prices caused by the Iran war hit the UK economy and pushed up inflation and borrowing costs.

📉 Rising debt interest

Healey said financial market movements added £14bn to government borrowing costs this year. The government now spends about £1 in every £13 on debt interest.

🔒 Political locks

Labour’s manifesto ruled out raising the rates of income tax, employee National Insurance or VAT — the three biggest taxes.

The squeeze on “headroom”

Fiscal headroom: the margin by which the government is forecast to meet its fiscal rules. Think of it as a safety buffer — if forecasts worsen by more than the headroom, the rules are broken unless taxes rise or spending falls.
March 2026 forecast
£23.6bn
IFS pre-Budget estimate
~£11bn
Resolution Foundation estimate
~£12bn
OBR, before measures (2029/30)
£12.5bn
OBR, after the Budget (2029/30)
£14.5bn

Headroom against the “stability rule” (current budget in balance) in 2029-30. The Chancellor rounded £14.5bn to £15bn. Sources: OBR March and October 2026 forecasts; IFS and Resolution Foundation pre-Budget estimates.

Tell me why… higher gilt yields shrink the Chancellor’s headroom.
Gilt yields are the interest rate the government pays when it borrows. When yields rise, every new gilt issued — and debt that is rolled over — costs more in interest. Debt interest is day-to-day spending, so it counts against the stability rule and eats directly into headroom.
Tell me why… the think tanks warned against a “steady as she goes” Budget.
The Resolution Foundation urged around £8bn of tax rises to rebuild the buffer, and the IFS warned that leaving spending plans unchanged would implicitly mean real cuts to some services. A thin buffer leaves the Chancellor exposed to the next shock, with a risk of emergency measures later.

Key concepts for this Budget

Stability rule: day-to-day (current) spending should be covered by tax revenue by 2029/30 — borrowing is only allowed for investment.
Investment rule: a broad measure of public sector net debt (net financial liabilities) should be falling as a share of GDP. This lets the government borrow to invest.
Fiscal drag: income tax thresholds stay frozen (the £12,570 personal allowance until April 2031), so as wages rise more people are pulled into tax or into higher bands — a “stealth” tax rise.
Hypothecated tax: a tax whose revenue is earmarked for a specific purpose — like the new bank surcharge being used to fund energy bill support.
Section 3

Decision-by-decision analysis

Each card sets out what was announced, the analysis (the chain of reasoning economists would use), and the evaluation (what the outcome depends on). Finish each card by writing your own judgement.

Evaluation toolkit: magnitude (how big?) · time lags (how soon?) · elasticity (how responsive?) · incidence (who really pays?) · unintended consequences · opportunity cost · it depends on the state of the economy.
Section 4

Winners and losers

Every Budget redistributes. For each group, decide: winner, loser or it depends. Then reveal the suggested verdicts and argue with them.

Overall: progressive or regressive?

A Budget is progressive if it takes a larger share of income from the better-off, and regressive if it hits poorer households hardest. On the measures above, this Budget leans progressive: the main tax rises fall on savings, property, banks and wealthier business sellers, while the giveaways target lower-band council taxpayers, the low-paid, pensioners and small firms.

Tell me why… a Budget can look progressive on paper but feel different in practice.
Because of incidence and behaviour. Landlords may pass taxes on to renters; banks may pass the surcharge on through lower savings rates; fuel duty freezes give most cash to those who drive most. And measures not in the Budget matter too — the frozen income tax thresholds keep dragging low earners into tax. Distributional analysis (from the IFS and Resolution Foundation) looks at the whole package.
Your judgement: Which group do you think has the strongest case to feel let down by this Budget? Justify using at least one piece of economic theory.
Section 5

Be the Chancellor

Your mission

You inherit Healey’s problem. After the energy shock and rising gilt yields, the OBR’s pre-Budget forecast leaves you headroom of just £12.5bn in 2029-30 — the year the stability rule is tested. Build a Budget that:

  • keeps headroom above £10bn — below that, gilt markets get nervous and borrowing costs rise;
  • never breaks the stability rule (headroom below £0);
  • does the best you can for growth, inflation, fairness, public services and political trust.

Tick the policies you want. Watch the dashboard. Then press Deliver your Budget and compare your choices with Healey’s.

Healey’s real measures are calibrated roughly to the OBR’s costings for 2029-30; other options are illustrative. Watch out: temporary measures that end before 2029-30 do not change headroom at all. Scores are judgements, designed to provoke debate.

Your Budget dashboard

Headroom against the stability rule (2029/30)
£12.5bn
£0 (rule broken)£10bn (markets calm)£30bn

After the simulation

Tell me why… raising the basic rate of income tax by 1p would have been the “economist’s choice” but not the politician’s.
A broad-based tax raises a lot of revenue at a low rate, which causes less distortion than many small, narrow taxes. But it would break a manifesto promise, damaging trust — and a government that loses trust may struggle to pass future reforms. The “best” policy depends on the objectives you weigh most heavily.
Tell me why… the bank surcharge and the £100 rebate do not change headroom at all.
The stability rule is tested in 2029-30. Both measures are temporary and end before then, so they change borrowing in 2026-28 but not the current budget in the target year. This is why Chancellors like temporary giveaways — and why critics say a single target year encourages gaming.
Tell me why… capital investment barely dents headroom in the game.
The stability rule only covers day-to-day spending. Borrowing to invest is allowed under the investment rule, so only the extra debt interest hits headroom. Supporters say this protects growth-boosting investment; critics say markets care about total debt, however it is labelled.
Your judgement: Did your Budget prioritise the same objectives as Healey? Explain one trade-off you were forced to make.
Section 6

The OBR verdict

The OBR’s October 2026 Economic and fiscal outlook is its first forecast to fully reflect the Iran war: its March forecast was finalised just before the conflict began. Higher energy prices are a negative terms-of-trade shock for the UK, a net energy importer — pushing inflation up and real incomes down.

Real GDP growth
1.2% → 1.0%
2026 → 2027. The 2027 figure is half a point below March’s forecast.
CPI inflation 2027
3.4%
Peaking at about 3¾% early in 2027; back to 2% target by 2028. March expected 2.0%.
Unemployment (LFS)
5.1%
In 2027, up from 4.8% in 2025, before falling to 4.1% by 2031.
Real earnings
0%
No real earnings growth expected in 2027 or 2028. Real income per person dips in the near term.
Borrowing (PSNB)
£133bn
4.2% of GDP in 2026-27, falling to £67bn (1.8%) by 2030-31.
Public sector net debt
95.5%
Of GDP in 2026-27, peaking at 97.3% in 2028-29, then 95.6% by 2031-32.
Headroom (stability rule)
£14.5bn
In 2029-30 (rounded to £15bn in the speech), with a 56% chance of meeting the rule.
Tax burden
37.9%
Of GDP in 2027-28 — beating the previous record of 37.2% — then 38.6% by 2031-32.
Debt interest
3.9%
Of GDP in 2026-27; up from 1.7% (£39bn) in 2019-20 to £109bn last year.

Source: Office for Budget Responsibility, Economic and fiscal outlook – October 2026 (executive summary, Tables 2.1, 7.1, A.1, A.9). The 83% debt figure quoted in the speech is public sector net financial liabilities (PSNFL), the measure used for the investment rule — not headline net debt.

Chart 1: Inflation — what the war did to the forecast

CPI inflation, annual average, %. March 2026 vs October 2026 OBR forecasts. Source: OBR.

The diagnosis: lower growth and higher inflation together are the signature of a negative supply-side shock. Higher oil and gas prices raise firms’ costs, shifting SRAS to the left: the price level rises while real output falls.
Tell me why… the OBR expects inflation to fall back quickly this time, unlike in 2022.
Second-round effects. In 2022 workers bargained successfully for higher wages, feeding a wage–price spiral. Today the labour market is looser — unemployment is around 5% — so workers have less bargaining power. Nominal wages rise only a little faster than planned, and inflation falls as energy prices drop back.

Chart 2: Growth — a dip, then recovery

Real GDP growth, %. Bars: October 2026 forecast (2025 is outturn). Dots: March 2026 forecast for 2026 and 2027. Source: OBR.

Tell me why… growth holds up in 2026 but slows in 2027.
Time lags. The OBR says the economy has so far been resilient to higher energy prices, but it takes time for higher energy costs and interest rates to weigh on spending and investment. Higher Bank Rate affects mortgages as fixed-rate deals end, and household consumption growth is forecast to slow to just 0.6% in 2027.

Chart 3: Loosen now, tighten later

Direct effect of Budget policy decisions on borrowing, £bn. Positive = more borrowing (loosening). Source: OBR, Table 3.1.

Averaged over five years, the OBR calls the package broadly neutral (about £1.3bn a year). But the profile matters: support and spending come now, while tax rises and spending restraint arrive later — including a £5.5bn cut to day-to-day spending pencilled in for 2031-32.

Tell me why… economists are sceptical of “backloaded” plans.
Future tightening has to be delivered by future governments. 2029-30 is likely to be an election year, and plans to cut borrowing have been delayed repeatedly since 2022 — the OBR shows borrowing reaching 2% of GDP two years later than first planned. KPMG’s chief economist questioned how durable this approach will prove.

Chart 4: A record tax burden

National Accounts taxes as % of GDP. The vertical axis starts at 34% to show the change clearly. Source: OBR, Table A.9.

Tell me why… the tax burden keeps rising even though no major tax rates went up.
Mostly fiscal drag and higher inflation. With thresholds frozen until 2031, rising nominal wages push more income into tax: the OBR forecasts income tax rising from 10.7% to 12.2% of GDP. Higher inflation boosts nominal earnings and profits, so receipts rise faster than the economy.

Chart 5: Borrowing falls — slowly

Public sector net borrowing, % of GDP, 2025-26 (outturn) to 2031-32. Source: OBR, Table A.9.

Tell me why… higher inflation shrinks headroom even though it raises tax revenue.
Inflation does raise tax receipts. But about a quarter of UK gilts are index-linked, so higher RPI immediately raises their cost — the OBR adds £15bn to debt interest this year. Benefits and pensions are uprated with prices, and higher inflation keeps Bank Rate and gilt yields up. The cost side outweighs the revenue side.

Judging the Budget against the OBR

Are the fiscal rules met?
Yes, but only just. The current budget is in surplus by £14.5bn in 2029-30, so the stability rule is met — but the OBR puts the probability of meeting it at only 56%. Debt (PSNFL) is falling in 2029-30 by a margin of £24.4bn, with a 54% probability. The OBR says it would take a £25bn margin to reach even a 60% chance. The government’s separate welfare cap is breached by £2.8bn.
How much of the squeeze was forced, and how much was chosen?
Mostly forced. Higher interest rates and inflation left pre-measures borrowing about £11bn a year higher than in March, with debt interest up £15bn this year. Before Healey’s measures, the margin was £12.5bn. His decisions actually added £2bn to headroom in 2029-30, because the giveaways are temporary while the tax rises are permanent.
How solid is the £14.5bn?
Less solid than it looks. It assumes fuel duty rises sharply in July 2027 — a rise that has been delayed five times. Without future fuel duty rises, the OBR estimates headroom would be about £10.2bn. A one-percentage-point rise in interest rates would add around £16bn to debt interest; a higher energy-price path could add £17bn to borrowing in 2027-28.
Is the Budget a real-terms pay rise for the low-paid?
Only just. The minimum wage rises 3.9% while CPI averages 3.4% in 2027 — a real rise of roughly half a percentage point. More widely, the OBR expects no real earnings growth in 2027 and 2028, and real household disposable income per person only 1% above its pre-pandemic level in 2029-30.
Your judgement: Using the OBR’s figures, was Healey right to keep headroom thin rather than raise more tax? Consider the 56% probability, the fuel duty assumption and the risk of another shock.

What the analysts say: KPMG

The overall verdict

Chief economist Yael Selfin called it a cautious Budget that leaves difficult choices for later, noting “there are questions over how durable this approach will prove.” She judged headroom low by historical standards, with most of the fall driven by higher gilt yields.

On the banks

Peter Grant, KPMG’s banking tax lead, called the surcharge modest but warned it could reduce lending capacity, hitting mid-sized and specialist banks hardest because they have fewer ways to absorb the cost.

On consumers and retail

Linda Ellett, head of consumer, retail and leisure, welcomed the cost-of-living and rates help but expects consumer spending to stay under pressure into 2027, with shoppers waiting for discounts.

Tell me why… a thin buffer can force “fine-tuning” at the next Budget.
If headroom is small, even a modest forecast change — a rise in gilt yields or weaker growth — could wipe it out. The Chancellor would then have to announce tax rises or spending cuts just to stay within the rules, rather than choosing policy for its long-term merits. Frequent changes create uncertainty for households and firms.
Sources

Sources and further reading