The Chancellor will have two main aims in his first Budget this week: to help households and businesses cope with the coming surge in inflation, and to convince financial markets that the UK is not the next France.

He will have to do that without breaking manifesto commitments on tax, alienating backbenchers or upsetting voters. Given those constraints and the current economic climate, a ‘do no harm Budget' would be a significant improvement on the previous two. The challenge, however, is that every tough decision not taken on Wednesday will make the next Budget even tougher.

I have answered five of the most common questions I have been asked over the past month below. If you have further questions before or after Wednesday, please send them in.

What is the new fiscal headroom? And what exactly is ‘headroom’?

You may have heard an awful lot about fiscal ‘headroom’, including from me, over the past few weeks, and you will hear more on Wednesday. It is therefore worth spelling out exactly what it means. The UK has three fiscal rules, but the most important states that day-to-day spending, excluding investment, must be matched by tax revenues by the third year of the forecast. Think of it this way: a little spending on credit cards or Klarna is fine, but over the medium term you want your everyday spending to be covered by your salary. You would not expect to buy a house outright, however, so investment is excluded from the rule. There is another rule requiring debt to fall as a share of the economy, but it is less important for this Budget.

We can therefore think of fiscal headroom as a financial buffer. The government had £23.6bn of headroom at the previous Budget, meaning it could theoretically afford £23.6bn of additional borrowing before breaching its target.

However, the recent surge in global bond yields and inflation has eaten into that headroom. Higher interest rates have probably reduced it by about £11bn, while higher inflation pushes up both costs and revenues. A host of other factors feed into the forecast, but the most important is whether wages rise in response to higher inflation. If they do, that could offset a large part of the hit from higher gilt yields. The uncertainties here are enormous. Total tax receipts and current spending in the UK amount to about £1.2tn, so even a very small change in the forecasts can have a huge impact. That said, reasonable estimates suggest that the remaining headroom is between £12bn and £20bn.

That matters because, if Healey is to convince financial markets that he is fiscally prudent, he will have to limit the hit to his headroom. A larger hit would mean pencilling in more tax rises or risking a further increase in gilt yields.

Who will be the winners at the Budget?

Given utility bills are now likely to rise by more than 20% in January and inflation will rise to 4.5%, or even higher, resulting in another squeeze in real pay, support for the cost of living and cost of doing business is likely to be the other main theme of the Budget.

News reports suggest that the chancellor is focusing on limited, targeted support. That is sensible: a blanket energy support scheme, such as the one Liz Truss implemented during the last energy crisis, would be ruinously expensive and wasteful. Temporary support that expires before 2029/30 would not count towards the fiscal rules, making it easier to finance. Depending on the measures chosen, it might also reduce inflation in the short term.

There might also be some support for small businesses, possibly through business rates. However, this would probably be financed by higher taxes on larger businesses.

If there’s a rabbit pulled out of the hat, it’s likely to be on defence spending. But it’s difficult to see how the government could afford the roughly £11bn cost of getting defence spending to 3% of GDP.

Will taxes rise in the UK Budget?

Given the likely need to rebuild some headroom and fund support measures, and with spending restraint off the menu, some tax rises are likely. News reports also suggest that any additional spending will be ‘fully funded’, in a nod to fiscal responsibility.

That brings us back to our ‘smorgasbord’ from previous Budgets, just this time there are fewer options. Expect a raft of smaller measures with a higher bank surcharge and a tax crackdown on online retailers probably being the big revenue raisers. You can read more about the potential tax changes in our Budget preview.

The problem with the smorgasbord approach is that smaller taxes tend to produce worse economic outcomes. They prompt larger behavioural responses and are often distortionary.

Could the Budget cause another ‘Liz Truss’ crisis?

The most positive legacy of the Liz Truss ‘mini-Budget’ debacle is that no one wants to be the next Liz Truss. What is more, with UK gilt yields still among the highest in the pack, even if the premium is not quite as large as before, markets are clearly watching for any sign of fiscal impropriety. This is therefore likely to be a cautious Budget, with only a very limited rise in borrowing. Indeed, the government has reportedly rowed back from using Public Financial Institutions (PuFins) to boost borrowing without breaching the fiscal rules.

The biggest risk is probably that the chancellor presents plans that are widely viewed as lacking credibility, with higher borrowing now and unrealistic tightening in later years. That could quickly refocus investors’ attention on the UK.

Post-Budget outlook for tax, spending and growth

Overall, this should be a relatively quiet Budget with only limited rises in taxes, spending and borrowing. The bigger challenge will come next year.

The current fiscal plans envisage some fairly tough reductions in real spending for most government departments over the next few years, and they do not even account for the latest rise in inflation. Add in the need to increase defence spending, and the chancellor could face a much larger hole to fill at next year’s spending review or Budget.

Much of the scrutiny may therefore focus not on the measures announced on Wednesday, but on how credible the plans for the next few years appear. That probably means larger tax rises or spending cuts will be needed next year, which could potentially require an early general election.

Stronger economic growth finally appears to be feeding through to the labour market, with the unemployment rate falling from 4.9% to 4.7% in August, its lowest level since July 2025.

Of course, we still have to take the official data with a pinch of salt given the well-documented problems with the Labour Force Survey, from which the official estimates are derived. That said, the unemployment rate has been trending down since January 2026, so the broad trend of a recovering labour market looks genuine.

Looking at a broader set of indicators, payrolls rose by a healthy 13,000 in September, while August’s decline was revised to a small gain. What is more, the employment balance in the composite PMI, a widely followed business survey, suggested that employment grew in October for the first time since 2024.

At the same time, the stronger labour market is feeding through to pay growth. Private-sector pay growth excluding bonuses accelerated for the first time since late 2024. We think it will continue to rise to around 3.5–3.75% over the coming quarters. That probably will not be enough to prevent a real-terms pay cut for private-sector workers, but it does suggest a little less pain than we previously expected.

We expect September’s money and credit data to show consumers easing back slightly after a bumper August.

The pace at which consumers took on new credit will likely slow from £2.5bn to £2.2bn. This likely reflects some payback from a strong August when consumer credit rose to the highest on record. In any case, net consumer credit flows of £2.2bn would suggest that consumers continue to borrow at a healthy pace to keep spending growth ticking over.

Elsewhere, we expect mortgage approvals to rise from 54,900 to a still-weak 57,200, based on the signal from the new buyer enquiries balance in the RICS survey. Even so, approvals are likely to remain subdued as higher mortgage rates and stagnating real incomes squeeze affordability and prompt households to postpone house purchases. Indeed, mortgage approvals were already down 16% year on year in August.

Overall, we expect September’s money and credit data to show households continuing to smooth the impact of higher inflation through lower saving and solid borrowing flows. However, with inflation set to rise to around 4.5% in the new year and remain above 3% throughout 2027, this more persistent shock increases the risk that consumers pull back on spending, dragging on growth.

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