The UK Budget is coming up on Wednesday this week. What can we expect and what will it mean for Northern Ireland?
As usual the Budget will set out plans for tax, spending and borrowing. The Government will want to make some clear announcements given it’s Andy Burnham’s first Budget as Prime Minister, but at the same time they remain very constrained by their fiscal rules, muted economic growth and high energy prices. So we can expect a smaller scale Budget than in 2024 and 2025 in terms of new measures. The main themes are likely to be some more support for households’ rising energy costs, and for businesses struggling with higher energy and employment costs. Increased funding for defence is likely, which may be focused on capital investment rather than day-to-day spending.
A continuing tough fiscal environment
The challenge of the last few years remains - how to fund government spending from tax revenues and borrowing, while also keeping within the fiscal rules. UK Government debt is now above £3 trillion, and more is being spent on debt servicing than the whole education budget. Rising energy costs are having a growing impact on the cost of living and the cost of doing business. Economic growth figures have been more positive, but at the same time inflation is creeping up and an interest rate rise looks likely. The rapid rise in the total welfare bill, especially the number of young people not in employment, education or training, is a big concern.
Support for the cost of living
There will probably be some new support in the Budget for households struggling with the cost of living, particularly energy costs. This is likely to be targeted on those with the lowest incomes rather than for everyone. Fuel duty on petrol and diesel will probably remain frozen given rising costs at the pump. The full state pension looks set to rise by 3.9%, with an increase in the personal allowance for low-income pensioners so they do not pay tax on it. Tax-free pension lump sum limits may remain unchanged, despite earlier speculation.
Limited new tax rises
It seems that new spending will be funded by reducing the ‘fiscal headroom’ by about half (from around £24 billion) rather than major tax rises. The last two Budgets have seen significant rises to employer National Insurance, property taxes and capital gains tax, so the scope for further big changes at this stage is limited. The tax changes being suggested now include increased corporation tax for banks, and also possible additional taxes on gambling companies and landlords.
The Government remains constrained of course by its manifesto commitment to not raise income tax, National Insurance or VAT for working people. In practice however, most people are paying more income tax as thresholds have been frozen until 2031 - a change to this policy is possible but would be expensive.
New spending mainly on defence
Apart from defence, significant new spending commitments look unaffordable, and any new initiatives may have to be funded from savings elsewhere. There may be announcements about increased spending by local areas in line with the Prime Minister’s devolution agenda, but this might be moving money between existing budgets rather than new commitments. An early warning that planned funding allocations to departments in the next few years look extremely tight, so we can expect these to be revisited in next year’s Spending Review.
Northern Ireland’s budget
What does this mean for Northern Ireland’s own public finances? Having not agreed a budget for 2026-27 yet, the Executive is still in discussions with the UK Government about additional funding, and there remains a huge gap between what is being offered and what is being requested. Limited new spending in Wednesday’s Budget means it is unlikely to yield big amounts in additional Barnett consequentials - but at the same time a small boost from new funding might help to push the UK-NI negotiations towards a conclusion, especially if it was combined with some re-profiling of the current offer.
A reminder that Budget announcements in devolved policy areas don’t apply in Northern Ireland; the Executive receives an additional amount of funding instead, which it can spend as it wants. Also if new UK spending is focused on non-devolved policy areas (most obviously defence), then there is no Barnett consequential. The same applies if funding is moved around between existing budgets within England, which might feature given the Prime Minister’s focus on devolution.
