Chancellor John Healey faces a difficult balancing act in the Budget on Wednesday, October 28, as he seeks to raise taxes without damaging London's role as the engine of the UK economy. The scale of the tax hit on the capital will only become clear as the fine details of the Budget emerge in the hours and days after its publication.
Inflation, fuelled by Donald Trump's war in Iran, rose to 3.5% in September, intensifying financial misery for millions of households and giving Mr Healey a growing headache just days before the Budget.
The £35 billion fiscal challenge
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.
At the core of the problem is the failure of numerous Chancellors to face up to the reality of Britain's public finances after the 2008 financial crisis, the Covid pandemic and the self-inflicted economic harm of Brexit. 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.
London's economic engine under pressure
The Chancellor has to find a so-far elusive jump in economic growth, so there is a bigger cake to share out. London 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.
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.
Tax decisions and business confidence
Banks in the City are already braced for a new £2 billion-a-year tax raid. 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. However, wealthier people in London and beyond will have been relieved by the Chancellor's decision not to raise capital gains tax. He is also not expected to lower the threshold for the “mansion tax” from £2 million to £1.5 million. He is set to back Lord Sadiq Khan's plan to open up Stratford International Station for cross-Channel rail services.
The first instincts of Mr Healey, a former TUC campaigns director on Labour's soft Left, may have been for a sizeable tax grab. But he knows that hammering the wealthy risks driving more people out of the capital to more tax-advantageous countries, undermining the engine driving Britain. It is a fine balancing act that he will have to pull off.
