Chancellor John Healey is considering cutting the government’s financial reserve to create room for tax adjustments in the Autumn Budget, following discussions between the Treasury and Downing Street. This adjustment would reduce the planned buffer from the £23.6 billion target established by the Office for Budget Responsibility in March, freeing up resources for spending changes ahead of the October 28 announcement.
The government’s fiscal rule mandates that day-to-day spending must be covered by tax revenue by 2029/30. However, higher gilt yields, partly caused by Middle East geopolitical risks, have made maintaining the original buffer more difficult, financial analysts note. While some investors warn that a reserve below £20 billion could harm stability, others maintain the OBR’s March projection remains a sound reference point.
Healey has stressed the need for a buffer to address economic unpredictability, though he has not yet fixed a specific figure. Final decisions on the reserve size will likely be revealed closer to the Budget date. Officials plan to defend a smaller buffer by pointing to increased borrowing costs and lower energy bills, which have eased some financial constraints.
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The fiscal flexibility debate intensifies as economic pressures mount. The Middle East conflict has added strain, with Shadow Chancellor Andy Burnham admitting Labour’s recent tax increases were necessary to boost revenue. Spending cuts are also being considered as the conflict drags on, but those to public services are likely to be resisted by Labour backbenchers. Welfare reform plans have already been pushed back to 2027 as Burnham looks to avoid another backbench revolt.
Additional financial demands, including the Defence Investment Plan, will further tighten the budget. Leaks suggest the Treasury may target higher earners, possibly introducing a bank levy, raising capital gains tax, or lowering the mansion tax threshold from £2 million to £1.5 million. The government has not confirmed these proposals, and a Treasury representative declined to address speculation about the reserve adjustment.