Chancellor John Healey does not need to raise taxes at the upcoming Budget to deliver what Panmure Liberum economist Simon French called ‘immediate remedial action’ for the UK economy, according to an analysis that nonetheless warns the new government faces a spending agenda that could cost £39bn a year more than current plans. The assessment, published as markets watch for any sign of a damaging fiscal squeeze in October, argues that Healey Budget tax rises are not a near-term necessity, despite the headwinds facing public finances.
French, who formerly worked at the Treasury, said in a note shared with traders that the fiscal outlook for the government would be ‘broadly in the same position’ as it was at the start of 2026. Healey remained ‘hemmed in’ by Labour’s manifesto commitments and the current fiscal rules, French wrote, but the energy price shock from the Iran war was unlikely to have eaten heavily into the available headroom.
‘The best that can be said for market participants fearing a damaging fiscal squeeze in October is that there is no smoking gun here flagging a large deterioration in fiscal headroom since March,’ French wrote. ‘Immediate remedial action just to retain the policy status quo is, in our view, not likely to be required.’
Headroom under pressure but no collapse
The fiscal buffer currently stands at £22.7bn, as set by the Office for Budget Responsibility. French argued that a combination of factors could trim roughly £5bn from that figure: modestly stronger-than-expected growth, net migration trends, and unreliable labour market data. Higher equity prices, he added, could partially offset the hit from a rise in gilt yields, which push up projected government borrowing costs.
The Office for Budget Responsibility had already flagged a cautionary note earlier this year, warning that it had under-estimated government borrowing levels after the 2022 energy price shock caused by Russia’s full-scale invasion of Ukraine. That history suggests the OBR could again provide a bleaker read of UK public finances at the Budget, even if French’s analysis implies the deterioration since March has been contained.
Wider economic risks have not gone away. Analysts at EY have said that disruption extending into the middle of next year across the Strait of Hormuz, through which a fifth of the world’s oil and gas supply passes, could push the UK economy into recession. On a more positive note, researchers at Morgan Stanley have said it had become ‘more likely’ that the private sector was enjoying a ‘longer lasting’ upswing in output per hour. LSE academics who advised Rachel Reeves have argued annualised productivity growth is running at 1.6 per cent from the third quarter of 2024 to the present day.
Burnham’s ambitions and the Healey Budget tax rises question
The central tension in French’s analysis is not the immediate fiscal position but the medium-term spending pressures gathering under Andy Burnham’s premiership. Panmure Liberum’s own estimate is that the government’s publicly stated ambitions, including raising defence spending to three per cent of GDP by 2030, increasing the income tax personal allowance and boosting social care funding, could cost £39bn a year more than current plans.
The defence commitment carries particular weight given the recent political history around it. According to The Guardian, Burnham has recommitted the UK to lifting defence spending from 2.6 per cent of gross domestic product to the Nato target of 3.5 per cent by 2035. In his resignation letter, Healey himself had called for the government to set ‘a headmark date for 3% of GDP on defence in 2030’, a more aggressive timetable that his predecessor, Starmer, had resisted: Starmer had been willing to offer only 2.7 per cent that year, despite public statements that defence spending was a priority. Committing to Healey’s original 3 per cent target by 2030 would amount to £9bn a year more by the end of the decade, The Guardian reported.
French was clear that only a small number of structural tax reforms could raise enough revenue to fund what he called ‘radical’ policies credibly. The options he identified included extending national insurance to savings and investments, replacing the inheritance tax regime, lowering pension tax relief to a flat rate, or reforming property taxes. Anything short of those measures would leave the spending agenda substantially unfunded.
His conclusion was direct: ‘It is our base case that this Budget will be rhetorically more radical than it will be (or can be) financially.’ For the business owners and executives watching the October fiscal event, the message from Panmure Liberum is that a tax shock is not imminent but that the bill for Burnham’s broader programme is already taking shape on paper, and the maths for funding it remains unresolved.
