Chancellor John Healey is contending with a shrinking “fiscal headroom” as he prepares for this week’s Budget. Economists suggest the government’s cash buffer, intended to help meet fiscal rules and manage borrowing, may have halved over the past six months, dropping from approximately £24bn to as low as £11bn. This decline is partly attributed to the higher interest rates the government has incurred while borrowing from private investors. We’re likely to hear a lot about the chancellor’s “headroom” in this Budget. External on Wednesday, verify has looked at what other options could be on the table for the chancellor to raise some more money. If their pension investments include bank shares, external, and ordinary savers could be indirectly affected too. That would be small relative to the sums of money the chancellor might well need to restore his headroom and pay for any new spending. What do you want Verify to investigate.
To keep the government’s plan for reducing borrowing by the end of this Parliament on track, the Chancellor needs to secure additional funding. Compounding this challenge is the dual pressure to increase defence spending and provide cost-of-living support to the public. These fiscal needs must be balanced against Labour’s 2024 election manifesto, which strictly forbids raising the rates of VAT, National Insurance, or income tax.
One major area under consideration is increasing taxes on banks.
Due to higher interest rates, banking profits have surged in recent years. Industry leaders widely anticipate that the Chancellor will target this sector in the upcoming Budget. Tax Policy Associates estimates that raising the bank corporation tax surcharge from 3% to 5.5% could generate between £1bn and £2bn annually for the Treasury. While this would directly reduce bank profits for shareholders, institutions have warned that such a hike could deter investment, threaten jobs, and potentially result in lower savings rates or higher borrowing costs for consumers.
A second proposal involves increasing taxes on electronic gaming machines found in betting shops and adult gaming centres. Former Prime Minister Gordon Brown has advocated for this change, citing the social harm caused by problem gambling. The Social Market Foundation has estimated that doubling the tax rate from 20% to 40% could yield between £275m and £460m. However, the gambling industry cautions that such a move could force betting shops to close, which might negatively impact the horse racing industry and lead to job losses. Increasing taxes on capital gains or extending the mansion tax had been raised as possible options but have since been ruled out by government sources. Former Prime Minister Gordon Brown has called on Healey to hike the tax on electronic gaming machines – such as those found in betting shops and adult gaming centres which can offer payouts of £500 per game – citing the social harm imposed by problem gambling. Though anti-gambling groups argue this could help discourage more people from using them, people who use gambling machines could also end up having the tax passed on to them through worse odds on games. And that one in four people who play casino games on these machines gamble at risky or harmful levels, research from the SMF found that gambling machines are increasingly clustered on some of the UK’s most deprived high streets. Others close down and reopen under different company names to escape their tax liabilities. External and/or those who would otherwise receive them in future – and campaigners warn of the risk of people being pushed into poverty, cuts to health and disability welfare would reduce the incomes of people who currently receive those payments.
Thirdly, the government is exploring measures to ensure large online marketplaces, such as Amazon, Ebay, and Temu, take responsibility for collecting VAT owed by third-party retailers. The Treasury currently reports a “VAT tax gap” of roughly £12bn a year, partially due to overseas sellers misrepresenting themselves as UK businesses or failing to pass on collected taxes. By shifting the collection duty to the platforms, the government expects to curb evasion and raise approximately £1bn in additional revenue. Amazon has indicated its support for the move, estimating it could bring in £700m annually. The above three tax measures together would raise a maximum of only around £3.5bn a year.
Finally, the government is revisiting potential savings in the welfare budget.
Prime Minister Andy Burnham has called for a fair reduction in welfare costs, particularly as health and sickness benefits have risen sharply since the Covid pandemic.
The Office for Budget Responsibility projects these costs will climb from £68bn this year to £81bn by 2031.
While opposition parties like the Conservatives and Reform have proposed massive savings of £36bn and £50bn respectively—figures viewed with skepticism by independent analysts—the government faces a difficult path.
Previous attempts by Keir Starmer and Rachel Reeves to trim these benefits by £5bn were derailed by a backbench revolt. External by £5bn a year by 2030, but were forced to reverse course after a revolt by backbench Labour MPs, keir Starmer and Rachel Reeves attempted to reduce spending on these benefits.
Economists note that while savings are theoretically possible, they often require significant upfront investment to support claimants into employment, which could offset any immediate gains for the Treasury. Graphics by Callum Thomson and Lewis McBlane.
