IFS: Initial response to Autumn Budget 2026

Responding to the Autumn Budget 2026, Helen Miller, Director of IFS, said:  

This was broadly the Budget that many were expecting. In the face of bad economic news, the Chancellor has chosen to accept higher borrowing over the next five years. There was a small set of giveaways in the next few years, paid for with even higher borrowing today and higher revenues in later years.  

The Chancellor's commitment to fiscal consolidation is welcome. But it is delivery that really matters. The plan to reduce borrowing has been pushed back. The planned consolidation has an Achilles' heel in the form of very tight plans for public service spending. This Budget has a raft of fiddly measures but very little that will move the dial on growth.   

Turning to the specifics. The OBR expects that higher borrowing costs have reduced 'headroom' against the binding fiscal rule to £13 billion. Increases in taxes are forecast to be slightly higher than spending increases in 202930, leaving headroom at £15 billion. It was a reasonable choice to allow the headroom to absorb the impact of higher borrowing costs but it is not costless. Borrowing will be higher and the Chancellor now has less scope to absorb future bad news.  

Cash-terms borrowing was due to fall significantly between last year and this year. Instead, it is now set to be effectively flat. Part of this is because of new giveaways - pushing up borrowing by £8 billion this year and £4 billion next year.  

There was the expected increase in tax on banks, but unexpectedly it will only be temporary. There were also tax increases for landlords and gambling. The biggest revenue-raisers involve making companies and Self-Assessment income taxpayers pay their tax slightly earlier. More widely, the hodgepodge of tax increases and cuts will further complicate the tax system; in most cases it is hard to see a clear economic rationale.  

Whether reductions in borrowing can actually be delivered depends heavily on public service spending plans, where growth is set to slow sharply after this year. History warns us to be sceptical of tight spending plans in later years of the forecast. Next year's Spending Review will be a crunch point, and looks very tough for many departments, whose budgets will be squeezed by higher inflation forecasts.  

The Chancellor is right that choices over priorities will need to be made. We should not underestimate the scale of the challenge. The plans for overall spending set out in the budget mean that spending choices at next year's Spending Review will be much harder than those made so far this parliament.  

There was very little detail on how the Chancellor plans to get to 3% of GDP on defence by 2030. Increasing investment in defence companies may contribute to the target but it is unclear how much this will lead to an increase in UK defence capabilities. There is much further to go to get to 3% of GDP on defence and it is hard to believe that this government will want to get there without topping up spending totals.  

There was a relatively small 'breathing space' package, relying on the outdated council tax system to provide one-off payment of £100 to around 80% of households in England, rather than just those on low incomes. Decisions to delay the rise in fuel duty and extend the 'temporary' cut to VAT on electricity until next July are unsurprising and there is a clear risk they won't actually be temporary.  

There were some decisions that were more important than their small scorecard effect suggests. The Chancellor announced plans to abolish standing charges for gas, pushing up per-unit prices instead. This moves prices in the right direction but in an ad-hoc way. On electricity markets the Chancellor signalled potentially welcome changes in direction on how policy levies are funded and the way future renewables capacity is procured. More worryingly, he also signalled an abolition of standing charges for electricity; if this were funded by higher per-unit electricity costs it would needlessly discourage electricity use and worsen existing distortions. 

The Chancellor set out a balanced approach to devolving tax revenues to mayors allowing areas to be rewarded for growth, but within guardrails that cap the biggest falls in funding by squeezing the most rapid growth. This sets a clear direction of travel and represents a real change in the financial stake that local areas have in economic growth.  

But on many other big areas disability benefits, support for young people, plans for social care, and the path for defence spending we are still waiting. Next year's Spending Review will continue to loom large. Chancellor Healey spoke today about a breathing room Budget for households and business and he will be hoping that he has bought the government some breathing room as well. But the government has left itself many difficult decisions, against a backdrop of lower headroom, worse living standards, and continued economic risks.