Budget 2026: Chancellor John Healey's big London dilemma as he battles to fire up Britain

Andy Burnham has injected a mood of optimism into Britain since taking over as Prime Minister, lifting Labour’s fortunes and hopefully helping to fire up UK plc.

The Chancellor, though, has to make the sums add up, a challenge fraught with difficulty.

It rose to 3.5% in September, intensifying financial misery for millions of households and giving Mr Healey a growing headache in the run up to today’s Budget.

Andy Burnham meeting Donald Trump, whose Iran war has pushed up inflation

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The Institute for Fiscal Studies recently warned that the Chancellor faces having to raise taxes, slash the welfare bill, or a combination of the two, by an eye-popping £35 billion to avoid having to take the axe to budgets for public services.

Inflation creeping up will only have exacerbated this grim outlook.

Rather than acting decisively to cut Britain’s debt mountain, now at a stratospheric £3 trillion, they have spent now, loaded up the nation’s credit card and pencilled in rises in spending on public services which experts say are so small as to be totally unrealistic, and certainly unlikely to be stomached by Labour backbenchers.

Which means the Chancellor has to find a so-far elusive jump in economic growth, so there is a bigger cake to share out.

And here is where he has to walk an economic tightrope over London.

The capital is the country’s economic engine, with Londoners each paying at least £5,000 more on average into Treasury coffers than the city receives back in Government spending.

London and the South East are the only two regions which are net contributors to the public finances.

Tens of billions of pounds generated by the capital are already channelled out of the city to support other regions.

Banks in the City are expecting a new tax hit in the Budget

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Mr Burnham’s devolution revolution may very well be a sound medium to long-term policy but it will need to be paid for, as will his more immediate plans to ease the cost of living for millions of families, build large numbers of council homes and take public control of utilities.

With Britain’s tax burden already at a post-war high, Mr Healey will also need to find billions to raise defence spending, an issue he resigned over, to 3% of GDP by 2030.

He appears set to reach for the tax-raising lever rather than cut benefits to fund some of the Government’s bold plans.

The Chancellor, though, is wary of repeating the mistakes of his predecessor Rachel Reeves.

She proclaimed economic growth was the Labour Government’s No1 priority but targeted businesses in her first Budget with a £20 billion increase in National Insurance contributions for employers, before launching another huge tax raid in her second Budget.

“I want to be a Chancellor who backs business in Britain making a profit, and those entrepreneurs who, in the end, are the ones who challenge the status quo, come up with innovative ideas,” says Mr Healey.

It is not quite New Labour’s Peter Mandelson who said in 1999 that his party was “intensely relaxed about people getting filthy rich,” dare one mention his name.

Former Chancellor Rachel Reeves hit businesses with hefty tax rises

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He is set to back Lord Sadiq Khan’s plan to open up Stratford International Station for cross-Channel rail services.

The scale of the tax hit on London, though, will only be known as the fine details of the Budget emerge in the hours and days after its publication.

The first instincts of Mr Healey, a former TUC campaigns director on Labour’s soft Left, may have been for a sizeable tax grab.