Dharshini David: Healey buys himself some time, but big questions still unanswered

Dharshini David: Healey buys himself some time, but big questions still unanswered

Although earnings are climbing, forecasters say that is not enough to offset higher prices and taxes.

John Healey spoke of setting Britain on a new course, but this Budget was more about adjusting direction than blazing a fresh trail.

It was plain that the financial consequences of the conflict in the Middle East have weighed on household and business finances – and on the government’s capacity to offer support.

The government did focus on those hit by higher energy and fuel bills, but the “breathing space” it sought to create was limited; it is a remedy that does not fully ease the pain.

The clearest sign was the official forecast that, although earnings will rise, they will not make up for higher prices and taxes.

Even after the extra support is included, households’ incomes after inflation and tax are expected to be typically lower over the next two years than at the start of the parliament, showing how far the war has knocked prosperity off course.

But the war cannot take all the blame. Taxes have also played a part. While there were few major measures aimed at households, the policy of previous chancellors to freeze the thresholds at which different income tax rates apply – fiscal drag – has been kept in place, quietly taking more money from pay packets.

Overall, this Budget pushes the tax burden – the share of the nation’s income going to the tax office – to a new record high of 38.6%.

Still, a more generous package would have been difficult to deliver. Higher inflation and debt have raised borrowing costs by £14bn in the past year alone.

The Chancellor had to convince the markets that lend the government money that he has a plan to reduce future debt, so those costs do not rise further.

As things stand, debt interest payments are expected to reach £160bn in 2032, more than twice what is spent on schools in England.

And the plans Healey has set out already use up some of the room he has in the public finances. He says he was right to do so – that is what such safety margins are for – in times of trouble. But the huge uncertainty that remains made going further very risky. High energy prices, for instance, could easily swallow up all the spare cash.

The outcome was what some have called a beige, cautious Budget. As Healey worked to demonstrate his fiscal credibility, there was not even the usual rabbit out of the hat, the end-of-speech sweetener.

The markets appear reassured – even if some of his tax-raising plans depend on closing loopholes and targeting those not paying the correct tax, which is always highly uncertain.

So the chancellor seems to have bought himself some breathing room. But that means some major questions have been put off for another day, especially on public services.

Higher-than-expected inflation may mean that if areas such as health and defence are prioritised, budgets for some other “unprotected” areas – justice and higher education, for example – are set to fall behind inflation after 2028.

There was also a suggestion from John Healey that he would draw on some of those budgets to support defence spending. Keeping those budgets in 2030 would mean finding tens of billions of pounds.

And questions over the other major spending area – welfare – remain unresolved. Between 2025 and 2032, spending there is expected to rise by £100bn.

The official forecasters also highlighted the sharp increase in sickness and disability caseloads since the start of the pandemic. They warn that if that trend continues, spending on such benefits would rise by another £13bn.

Any talk of welfare reform has been delayed until the upcoming review into the plight of workless young people.

Then there is the challenge of boosting growth. There was a little more detail on the devolution plans – but much still needs to be worked out.

And on another crucial part of the growth strategy, housebuilding, the news was disappointing. Even though first-time buyers are set to receive more help, their first home may become even harder to find.

Between regulation and higher costs – partly linked to the war – the OBR estimates that 190,000 fewer homes will be built by 2032 than it expected in March, a major setback.

So the chancellor may have announced 98 relatively small measures, but the to-do list is growing.

With his official forecasters warning that, in a very uncertain world, his finances face exceptional risks, taking a wait-and-see approach seems sensible.

The risks run both ways: the OBR says a quick end to the war and an improvement in the economy could bring a significant boost to the public finances.

So the chancellor has more reason than most to hope that happens soon.

As it stands, the official forecasters say incomes after inflation, or living standards, are set to be only 1% higher at the end of the decade than at the start.

A series of economic shocks beyond our control could derail plans to turbo-boost prosperity. And as today shows, breathing space only goes so far.