UK set for cautious budget as borrowing costs climb

The UK is preparing for a cautious budget as borrowing costs continue to rise, largely due to the ongoing US-Iran conflict. Finance Minister John Healey is set to unveil the first budget of the new Labour administration on Wednesday, facing the challenge of balancing defense spending with household expenses. Healey aims to provide some breathing space for households and targeted support for businesses, while keeping the budget relatively small-scale to tide the government over until a more significant policy shift in 2027.

The budget will include measures to ease the cost of living, such as cuts to tariffs on imported goods, an expansion of the parental pay regime, and potential extensions to fuel duty freezes. A windfall tax on banks may also be used to fund spending measures to help households manage rising energy bills. However, the government's fiscal headroom is expected to be reduced from £23.6 billion to £14.6 billion due to higher borrowing costs, which will increase the government's debt repayments.