UK budget tests new PM as Iran war fuels inflation and defence spending pressures

Britain's finance minister John Healey is set to present his first budget on Wednesday, as he attempts to balance defence spending and household bills amidst high inflation and increased borrowing costs. The rising costs, largely due to the US-Iran conflict, threaten to strain the government's debt load and burden both businesses and individuals.

The Labour government aims to make Britain more resilient in the face of these shocks, with Healey saying, "This budget is about getting through this difficult moment" and providing "breathing space" for households and "targeted support" for businesses.

Prime Minister Andy Burnham, who took office in July, pledged to finance the defence investment program outlined by his predecessor. However, Healey may postpone until next year the implementation of Nato's target of 3.5% of GDP for defence spending by 2035. Healey is also expected to delay details on meeting this goal, considering the constraints on financial resources.

The budget aims to address rising energy bills through a windfall tax on banks. It is anticipated to be a "stopgap" measure, with small-scale relief measures to help households cope with the cost of living. These may include cuts to tariffs on imported goods, an expanded parental pay regime, an extension of fuel duty freeze, and an increase in the minimum wage. The government also plans to reduce bureaucratic burdens to lower costs for businesses.

The budget will also include measures to strengthen AI safety amid global concerns over cyber and biological risks posed by artificial intelligence. However, the government's fiscal headroom is expected to be reduced to £23.6 billion in the budget update, as higher borrowing costs increase debt repayments. The Office for Budget Responsibility will release its latest growth and inflation forecasts along with the budget, as global bond yields hit multi-decade highs due to inflation driven by energy prices.