UK Budget Unveiled: Fiscal Discipline to Counter "Global Economic Storm," Aiming to Turn the Current Budget Positive Within Three Years

UK Chancellor John Healey unveiled his first budget on Wednesday, seeking to balance protecting household budgets, supporting the economy and maintaining public finance discipline amid rising global economic uncertainty, intertwined trade tensions and geopolitical conflicts. Healey described the current environment as a "global economic storm" and said the government would use part of its fiscal buffer to address inflation and cost pressures brought by the war between the US and Iran, while striving to achieve a current budget balance in the 2029/30 fiscal year. The core of the budget lies in easing household pressure through measures such as energy bill subsidies on the one hand, while maintaining a fiscal path of gradually declining borrowing and debt on the other. However, the UK's economic growth outlook has weakened somewhat, and the government's available fiscal space is relatively limited. Whether the budget can simultaneously achieve the goals of relief, growth and fiscal consolidation remains to be seen. Using fiscal buffer space to counter external shocks In his budget speech in the House of Commons, Healey said trade tensions are dragging on global growth, the Russia-Ukraine conflict continues, and the Middle East war is further pushing up costs for British businesses and households. He noted that what is being faced is not an ordinary economic headwind, but a "global economic storm." The Office for Budget Responsibility (OBR) listed the Middle East war as an important factor affecting economic forecasts. Healey said the government decided to use part of the fiscal buffer established last year to absorb the shock from the Iran war and protect the economy and household budgets. He stressed that the purpose of a fiscal buffer is to be used when needed and rebuilt when conditions allow. According to budget forecasts, the UK's fiscal buffer space will fall to GBP15 billion in the 2029/30 fiscal year, then rise to GBP22 billion in 2030/31. This change is broadly in line with economists' expectations and also reflects the government's need to use part of its fiscal margin to cope with short-term external shocks. Healey also pledged that the UK will achieve a current budget balance in the 2029/30 fiscal year, meaning day-to-day public spending will be covered by government revenue. This target is one of the core elements of the UK's fiscal rules and means the government must control the gap between day-to-day spending and revenue while supporting households and public services. Borrowing ratio expected to decline gradually, debt ratio to peak in the medium term According to budget forecasts, UK borrowing as a share of gross domestic product (GDP) will fall from 4.2% in the 2026/27 fiscal year to 3.4% in 2027/28, and further to 2.9% in 2028/29 and 2.1% in 2029/30. Thereafter, the ratio is expected to fall to 1.8% in both 2030/31 and 2031/32. As for debt as a share of GDP, it is expected to rise from 83.2% in the 2026/27 fiscal year to 83.8% in the following two fiscal years, then gradually decline to 83.1% in 2029/30, 82.3% in 2030/31 and 81.7% in 2031/32. This means UK fiscal consolidation will be a gradual process: the borrowing ratio continues to decline, while the debt ratio gradually falls after peaking in the medium term. Given risks such as external shocks and economic growth falling short of expectations, whether the government can deliver on this path will continue to affect the market's judgment on the sustainability of UK public finances. Growth forecasts diverge, next year's growth cut to 1% The UK economy has performed slightly better than previously expected this year, but the growth outlook for next year has weakened. The OBR raised its forecast for UK economic growth in 2026 to 1.2% from 1.1%, but cut its forecast for 2027 to 1% from 1.6%. Thereafter, UK economic growth is expected to gradually recover: 1.6% in 2028, 1.8% in 2029, 1.7% in 2030 and 1.6% in 2031. Healey noted that both the Bank of England and the International Monetary Fund had previously raised their growth forecasts for the UK economy, and the OBR's upward revision to this year's growth also reflects the UK economy's resilience under some external pressures. However, the downward revision to next year's growth forecast shows that the government still needs to face challenges brought by changes in the global economic environment. For investors, the key is whether economic growth can remain stable during fiscal consolidation. If growth falls short of expectations, government tax revenue may be affected, further squeezing future fiscal room for maneuver. Energy subsidies, bank tax increase and other measures become budget priorities On specific policies, Healey announced a number of measures involving household relief, taxation and the business environment. First, the government will launch a GBP2.6 billion energy subsidy plan, providing GBP100 per household to about 20 million households in council tax bands A to D to help ease energy bill pressure. Second, the UK plans to raise the bank surcharge by 3 percentage points from January 2027 for a period of 15 months. Previously, the bank surcharge was 3%, levied on top of the 25% corporation tax. The increase is intended to raise fiscal revenue, but may also trigger concerns in the banking sector about the tax burden and the competitiveness of the UK's financial services industry. Other measures include raising taxes related to high-stakes gaming machines, cutting the capital gains tax business asset disposal relief threshold from GBP1 million to GBP500,000, restoring the GBP20,000 tax-free Cash ISA allowance that had been due to be cut next year, and raising the threshold at which small businesses begin paying business rates. On defense spending, Healey said the government will fully fund the defense investment plan. The plan had previously faced a GBP4.7 billion funding gap, and the commitment is intended to respond to concerns about the UK's defense spending arrangements. Overall, these measures show the government is trying to balance household relief, tax revenue and public spending needs within limited fiscal space, but some tax increases may also impose additional costs on financial institutions and businesses. UK bank stocks rise, gilts and sterling reaction relatively muted With the increase in the bank surcharge smaller than previously feared by the market, UK bank stocks rose at one point on Wednesday. NatWest Group shares rose as much as 2.8%, Barclays rose 2.7% and Lloyds Banking Group rose 2.5%. Previously, the banking sector had warned that if the bank surcharge were restored to 8%, the level before the 2023 cut, it could weaken the international competitiveness of the UK's financial services industry and affect credit supply and investment. Industry lobbying group UK Finance had also warned that a higher bank surcharge could reduce lending volumes and UK domestic investment. In the bond market, UK gilt yields changed little overall during Healey's budget speech. The 10-year UK gilt yield fell 2 basis points to 5.33%, while the 2-year yield was flat at 4.94%. Sterling hovered near its lows of the day against the dollar and the euro. The market reaction shows investors are still weighing the budget's fiscal discipline, tax measures and economic growth prospects. The rise in bank stocks reflects some easing of concerns about the scale of the bank tax increase, but the relatively muted performance of gilts and sterling also suggests the budget has not yet significantly changed the market's overall judgment on the UK macroeconomy and public finances. Balance between fiscal discipline and economic growth still to be tested Healey said the budget is intended to support the UK in coping with the current global economic shock while setting a clear direction for future development. However, the government's challenge is not only to control public finances, but also to deliver policy commitments in an environment of slowing growth and persistent cost-of-living pressures. The Labour government led by Prime Minister Andy Burnham hopes the budget will extend the recent momentum of recovering approval ratings, but the opposition Conservative Party and Reform UK may still raise questions over defense spending, welfare spending and the pace of economic reform. Overall, the UK's first budget chooses to use part of its fiscal buffer in the short term to provide energy subsidies to households, while raising revenue through measures such as the bank tax and setting a medium-term path for borrowing and the debt ratio to gradually decline. The divergence in economic growth forecasts reveals the difficulty of this strategy: the UK's performance this year is better than expected, but next year's growth outlook has weakened, and the balance between fiscal consolidation and economic support remains fragile. In the future, whether the UK can honor its current budget balance commitment and promote sustained economic growth while coping with geopolitical conflicts and global economic volatility will be the key test of this budget's effectiveness.