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In the upcoming Budget, the Chancellor’s available “headroom” — essentially the government’s financial buffer to meet fiscal rules and reduce borrowing — will likely be a key focus. Recent economic analysis suggests this cushion has shrunk significantly over the past six months, declining from approximately £24 billion down to possibly as little as £11 billion. One contributing factor is the rise in interest rates that has increased the government’s borrowing costs. Chancellor John Healey may be compelled to generate additional revenue to replenish this buffer, demonstrating the government’s commitment to reducing borrowing by the conclusion of this parliamentary term.
Alongside the necessity to restore fiscal headroom, Healey faces pressure to allocate funds to assist people struggling with rising living costs and to increase defence spending. However, Labour’s 2024 election manifesto explicitly ruled out increasing income tax, VAT, or National Insurance rates. Earlier considerations to raise taxes on capital gains or reintroduce a mansion tax have been dismissed by official sources as viable options. This context leaves the government searching for other means to bolster its coffers without breaking prior tax commitments.
Several measures have been identified as possible tax adjustments. One proposal includes raising taxes on banks, which have seen profit increases as they benefit from higher lending interest rates. Industry insiders widely expect the Chancellor to hike the bank corporation tax surcharge from 3% to 5.5%. According to estimates from the think tank Tax Policy Associates, this change could boost Treasury revenues by between £1 billion and £2 billion per year. Another tax-related option involves increasing levies on electronic gambling machines. Former Prime Minister Gordon Brown has publicly called on Healey to tighten taxes on such machines, citing concerns over social harm from problem gambling. Research from the Social Market Foundation indicates that doubling duties on these machines could generate between £275 million and £460 million annually, though some of this cost might be passed on to players through less favourable gaming odds.
In addition to these tax increases, the government may tighten VAT enforcement on online marketplaces like Amazon, eBay, and Temu by making these platforms responsible for collecting VAT owed by the retailers using their services. The Treasury estimates it loses around £12 billion annually due to VAT evasion and non-compliance. By shifting collection responsibility to the marketplaces, which already support the move, an estimated extra £1 billion in VAT revenue could be secured each year. However, this might lead some sellers to raise prices or withdraw from these platforms, affecting shoppers. Lastly, while tax measures might raise some revenues, the Chancellor may also consider reducing welfare expenditure. Though cuts to working-age benefits have been politically contentious — with past attempts to reduce spending being reversed due to internal party opposition — some believe that welfare reform could yield significant savings over time. Nonetheless, experts warn that upfront investment would likely be required to help claimants transition into employment, and cuts to health or disability benefits could risk pushing vulnerable people into poverty
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