Budget 2026: six charts that reveal the economic realities facing the chancellor

John Healey will deliver his first budget on Wednesday as UK households and businesses come under pressure from the unfolding economic shock caused by the war in the Middle East.

Against a febrile backdrop in global markets, the chancellor is facing a delicate balancing act to provide “breathing space” measures to ease the cost of living crisis while increasing growth and sticking to the fiscal rules.

Healey will also flesh out Andy Burnham’s pledge to deliver “good growth in every postcode”, with measures to hand local leaders more money and power.

Here are six charts that will underpin the chancellor’s decisions.

Sticking to the fiscal rules

At the spring statement, Healey’s immediate predecessor, Rachel Reeves, left herself £23.6bn of “headroom” against the fiscal rules, which require day-to-day spending to be matched by receipts by the end of this parliament.

However, the buffer is widely expected to have been slashed by a surge in debt interest costs, as the war in the Middle East causes a global inflation shock that is rattling the bond markets.

The Resolution Foundation estimates headroom has been halved to about £12bn. Much will depend on the judgement of the Office for Budget Responsibility (OBR), the independent Treasury watchdog, which will take into account the hit from rising debt costs, but also other positive and negative developments for the public finances – including inflation, pay growth, employment and productivity.

Healey is thought to be willing to allow the buffer to take a hit. However, jittery bond investors will be looking for him to retain some headroom to guard against further negative shocks, with at least £14bn thought to be needed to avoid provoking a bond market reaction.

‘Breathing space’ measures

The chancellor has pledged “breathing space” measures for households and businesses grappling with the cost of living crisis, as the energy price shock fuelled by the Iran conflict hits consumers.

Petrol and diesel prices have surged close to record highs and energy bills are forecast to increase to £2,000 a year from January for the typical household. Since 2021, consumers have paid almost £14,000 on average in additional costs for mortgages, loans, energy and water bills.

Healey is thought to have earmarked more than £1bn to help energy consumers, the bulk of which will go on increasing the discount given to households on certain benefits. He has also vowed to help businesses, and has been urged to extend a cut in fuel duty.

Alongside energy support, Andy Burnham has already promised Labour will cut living costs through other measures – including a new mortgage scheme for first-time buyers, and a pledge to build more social homes.

Rewiring the state

Burnham has made “growth in every postcode” his top political slogan since becoming prime minister. With devolution likely to be a central theme of the budget, a raft of measures are expected to add some substance to the rhetoric.

Central to the devolution package will be plans to allow local leaders in England to retain a share of income tax, alongside a new £1.5bn borrowing facility for directly elected mayors.

Britain is the most centralised G7 country for tax and spending policy, and is among the most economically unequal, according to the Centre for Cities thinktank. The aim of redrawing the political map – including establishing a new hub for No 10 in the north, based in Manchester – is to increase regional economic growth, and with it the performance of the UK economy at large.

Burnham has also signalled that a strengthened industrial strategy will be key to his agenda, as well as measures to support high streets and towns.

Tackling the youth jobs crisis

The prime minister has said Britain is facing an “economic catastrophe and a moral failure” after a rise in the number of young people not in education, employment or training (Neet) to almost 1 million.

Tackling the youth jobs crisis will be a key budget theme. Business leaders have pressed Healey for tax cuts and help with labour costs to encourage youth recruitment, while ministers have explored options for overhauling the benefits system and making changes to apprenticeships.

Healey has indicated that welfare reform will be critical. There could though be costs attached – as any savings from changes to the system could be offset by higher spending on employment support. The government is handling the process carefully to avoid a repeat of the welfare rebellion faced by Keir Starmer, and is still awaiting recommendations from two key reviews – by the former Labour cabinet minister Alan Milburn and the Department for Work and Pensions minister Stephen Timms.

The government is understood to favour handing local leaders more power and money to support young people as part of the solution. Analysis from the Youth Futures Foundation, a charity, shows the risk of a young person becoming Neet is geographically uneven: rates are significantly higher in Blackpool, Birmingham, and Bradford than in Bath, Harrogate or Guildford.

Increasing defence spending

Having resigned as Starmer’s defence secretary over funding, Healey is widely tipped to use his budget to find more cash for the military. Burnham has also spoken of the importance of the defence sector for his reindustrialisation plans.

First, the chancellor will need to find an additional £1bn a year to fund Labour’s defence investment plan. Announced by Starmer in his final weeks in office, that put defence spending on track to reach 2.7% of gross domestic product by 2029.

However, Healey has expressed an ambition to spend 3% by 2030. The Institute for Fiscal Studies estimates an extra £11bn would be needed in that year. Longer term, the government is targeting spending of 3.5% of GDP on defence by 2035. This is equivalent to a £25bn increase in today’s terms.

Repairing the economic damage of Brexit

Burnham reopened the debate over Brexit in his speech to Labour conference in Liverpool, arguing that leaving the EU damaged the UK economy and failed to bring the benefits promised.

This week’s budget is expected to underscore the economic hit, including from a drop in net migration.

Net migration to the UK has fallen sharply from a record peak of almost a million in 2023. Earlier this year, the Office for National Statistics downgraded its estimate for the long-run figure to settle at about 230,000 annually, down from a previous assumption of 340,000.

On average, immigrants are net contributors to the exchequer, and so how the OBR accounts for this drop in its forecasts will be critical. Should it adopt a similar approach to the ONS, the Resolution Foundation thinktank estimates this could lead to a drop in tax receipts of £4.7bn by 2029-30 relative to previous forecasts.