The key facts
- The government's fiscal headroom may have shrunk from ~£24bn to ~£11bn due to rising borrowing costs
- The government's budget 'headroom' may have shrunk from around £24 billion to around £11 billion due to rising borrowing costs
- A bank tax could raise £1–2bn a year, gaming machines £275–460m, VAT collection by marketplaces around £1bn
- A tax on banks could raise £1–2 billion a year, gaming machines £275–460 million, and VAT collection by marketplaces around £1 billion
- Welfare spending cuts are seen as a larger but politically difficult reserve
Limited room for manoeuvre
Days before the budget, Chancellor of the Exchequer John Healey, according to economists' estimates, has a significantly reduced fiscal headroom — the cash buffer needed to comply with fiscal rules. According to BBC Verify, over the past six months it may have shrunk from roughly £24bn to £11bn, partly due to rising interest rates at which the government borrows from private investors. At the same time, Healey is under pressure to help people with the rising cost of living and to fund defence, while the Labour Party's 2024 manifesto promised not to raise income tax, VAT or National Insurance rates. Options to increase capital gains tax and extend the 'mansion tax' were ruled out by government sources. BBC Verify examined the four remaining options for replenishing the treasury.
Taxes on banks
UK banks have been increasing profits in recent years by charging higher interest on loans. Among bank executives there is a widespread belief that the chancellor is preparing a tax rise on the sector in this budget. The think tank Tax Policy Associates estimates that raising the bank surcharge on corporation tax from 3% to 5.5% could bring the treasury an extra £1–2bn a year. Banks warn that additional taxes could deter investors from putting money into the UK, which could cost jobs; ordinary savers could be affected indirectly if their pension savings include bank shares. Research also indicates that banks may pass part of the tax burden on to customers through lower savings rates or more expensive loans.
Fixed-odds betting terminals
Former prime minister Gordon Brown has urged Healey to raise the tax on electronic gaming machines — machines in betting shops and amusement arcades that pay out up to £500 per game — citing the social harm of problem gambling. The think tank Social Market Foundation estimates that doubling the tax from 20% to 40% would raise between £275m and £460m depending on how players respond. According to the SMF, the machines are increasingly concentrated on the poorest high streets in the country, and one in four people playing casino-style games on them does so at a risky or harmful level. The gambling industry, for its part, argues that a tax rise could lead to the closure of betting shops and reduce bookmakers' contributions to horse racing, putting jobs in that industry at risk.
Marketplaces collecting VAT
According to media reports, the chancellor is ready to announce that major online marketplaces — Amazon, eBay and Temu — will be responsible for collecting VAT owed by sellers on their platforms. The Treasury estimates the VAT shortfall at around £12bn a year — the so-called 'VAT gap'. Part of the problem is that some online sellers fail to charge VAT or fail to remit the tax they collect, and enforcement is difficult: some firms are based abroad while posing as British ones, and others close down and reopen under new names. The measure could raise about £1bn a year; Amazon itself, which supports the reform, estimates collection at £700m annually. Possible side effects are higher prices or sellers leaving the platforms, but the measure levels the playing field for compliant sellers.
Cutting welfare spending
The three tax measures together would raise at most about £3.5bn a year — little compared with the sums the chancellor may need. Prime Minister Andy Burnham said in the summer that he wanted to achieve a 'fair and sustainable' reduction in social security spending. The Conservatives claim they could save £36bn a year by restricting access to benefits, while Reform claims £50bn, although independent analysts doubt the realism of such figures. Spending on health and disability benefits is forecast by the Office for Budget Responsibility to rise from £68 billion this year to £81 billion in 2031. Keir Starmer and Rachel Reeves have already tried to cut this spending by £5 billion by 2030, but were forced to back down after a rebellion by Labour MPs. Experts note that savings are possible, but would require upfront spending on employment support, while cutting payments would reduce recipients' incomes — human rights campaigners warn of the risk of poverty.
What this means
The event matters because it determines at whose expense the government will close the budget gap: from banks, gamblers and online sellers to benefit recipients. In practical terms, this means possible higher borrowing costs and lower returns on savings, changes in prices on marketplaces and, in the event of cuts, a direct impact on the incomes of people with health problems. It is not yet known which specific measures will be included in the final budget, which will be presented on Wednesday.
