Director Weekly  The IoD’s Budget preview

The UK approaches the 2026 Budget in a better economic position than anyone could have expected even a few months ago, yet there is no denying that major challenges lie ahead.

In this week’s Director Weekly blog, we take a deep dive into the economic backdrop to the Budget, before assessing the Chancellor’s stated priorities and the policy measures that have been signalled in advance. And we consider how the expected measures might stack up against the IoD’s priorities, setting out five tests against which next week’s package can be assessed.

The backdrop: a resilient economy – with caveats

As we highlighted last week, GDP growth has been better than expected so far this year, particularly in Q2 and Q3. The IoD’s data corroborates the resilience story, with revenue expectations improving, supported by growth in overseas markets, product and service innovation, tighter cost controls, and targeted AI investments.

But these positives come with caveats. Resilient growth is still weak growth. The UK’s IMF growth upgrade was below the advanced country average, and the consequences of conflict in the Middle East are expected to bite harder in the coming months. Supply pressures are likely to build, particularly for diesel, jet fuel and heating oil. Concerns that the OfGem price cap will need to rise further will be one of the factors behind this week’s decision to authorise the Jackdaw gas field.

Besides, along with its strengths, the UK retains several structural impediments to reaching its economic potential. UK investment still lags our peers, undermining a key support for productivity, and there is significant work to be done across skills, trade connectivity, and investment – as well as improving policy stability.

Unfortunately for business, the last two Budgets have only added to the challenges. They delivered significant increases in taxation, leaving the UK’s tax burden projected to rise at the fastest pace in the G7, according to the IMF. More rises could be on the way: borrowing has been running above forecast so far this year, reflecting spending that has outpaced higher-than-expected tax revenues.

What do we know about the Chancellor’s priorities?

We’ve been told a fair amount about how John Healey is approaching his first Budget as Chancellor, both through official speeches and the usual ‘officially unofficial’ media briefings.

In his first speech as Chancellor, Healey identified five priorities. They were fiscal discipline; growth in every postcode; backing British jobs and businesses; wealth creation;  and making life more affordable.

He added further detail in September’s growth speech at the Manufacturing Technology Centre (MTC) in Coventry, homing in on four priorities.

1. Reducing barriers to investment: reducing the regulatory burden, prioritising public investment that draws in private investment, increasing infrastructure approvals
2. Roadmap for fiscal devolution: allowing greater local retention of business rates and increasing the share of local income tax allocated to mayoral strategic authorities from 2028
3. The state as a customer: using public procurement as a mechanism for supporting firms to invest, innovate and scale
4. Technology, skills and good jobs: framing AI as an opportunity while seeking to ensure its risks are managed effectively, and ensuring that welfare is a route into work.

Those speeches had a lot to offer for business. But, as ever, the question will be how far warm words lead to a coherent set of pro-growth policy measures.

What giveaways and takeaways are expected?

The adoption of “military-style” security protocols to prevent Treasury leaks has not stemmed the flow of media briefings from the Chancellor’s team. As a result, we are fairly certain about a number of measures under active consideration.

Likely giveaways include business rates relief for high streets and an energy-support package for lower income households. Rate relief will be welcomed by many employers – though the concern will be that support for one subset of businesses, in this case hospitality and high street retailers, will be funded by raids on others.

A strong narrative on entrepreneurship is coming through as well, driven by the Chancellor’s interview in The Times – pleasingly entitled “My budget for bloody minded entrepreneurs”. We’ve had announcements on reducing the regulatory burden on small businesses by simplifying reporting requirements, alongside the extension of tariff suspensions on over 250 products. There’s the suggestion of tax incentives for entrepreneurs, welcome sympathy over the cost of doing business, supportive words for those seeking to make profit, and a reference to the pressures from ongoing changes in employment law.

The Chancellor is also described as “acutely” conscious of the trade-off between the minimum wage increases for young works and employment. Changes to the Low Pay Commission’s remit considerations reinforce those very points.

But against that backdrop, a number of takeaways are possible. An increase in the bank surcharge seems to be inked-in, as does an extension of online marketplace liability rules, potentially raising several hundred million. A move to charge income tax on family businesses when they’re handed down has also been tested, as has a rise in Machine Games Duty on high street slot machines.

Other measures to have been floated over the past couple of months now appear to be off the table, however. These include lowering the threshold for the mansion tax (which would raise an additional £400 million), aligning CGT with income tax (which could cost money without more fundamental reform), and a warehouse tax.

Behind those measures lies one of the big questions of this Budget: what will the Chancellor do about the fiscal headroom, the leeway intended to ensure the government meets its fiscal rules? The headroom was officially recorded at £23.6 billion by the OBR in March, but it appears to have been heavily eroded since then – perhaps by more than £10 billion. Government borrowing costs have been pushed upwards by the continued conflict in the Middle East, with its implications for inflation and interest rates.

That is not sparking huge alarm in the Treasury: the messaging from the Chancellor’s team suggests that they regard this as being what the fiscal buffer is for. But the upshot is that while new policy measures will be fully funded, the fiscal rules will now likely be met by a smaller margin. In other words, the Chancellor will borrow more.

Spending pressures ahead

Besides the measures expected to be addressed in next week’s Budget, it is worth recalling that Healey will also soon have to grapple with some other major spending requirements – potentially in a Spending Review next Autumn.

One is how to deliver sustainable increases in defence spending – the issue over which he resigned as secretary of state under Keir Starmer.

Then there is devolution, which is central to Andy Burnham’s political project. A white paper is expected at or around the Budget. Rewiring the state may improve growth in the long term – but a major overhaul of public services will involve significant upfront costs.

Meanwhile, difficult decisions on welfare reform have been put on hold – but cannot be dodged forever as spending pressures grow. Proposed changes to the pensions triple lock will deliver savings in the longer term, for example, but those savings will be spent on social care. Alan Milburn’s review on young people and work, and Stephen Timms’ disability welfare review are both now expected after the Budget. Their recommendations are likely to crystallise tough policy choices – and even tougher politics to navigate if ministers are to get reforms through Parliament.

Those issues are unlikely to surface in this Budget, but they will become live issues in the months ahead.

The IoD’s asks for this Budget

With that context in mind, the IoD has been clear in its messages to the Treasury. This Budget’s central priority should be creating a growth-friendly environment in the UK in which businesses are confident to invest and hire.

As we argued in our Budget Submission to the Treasury, the Budget must restore confidence and predictability. The government should refocus on driving up UK investment, growth and living standards, and reduce the costs and risks of investment and employment. It should do this through action in five areas.

1. Growth-first fiscal discipline: including tackling unsustainable welfare, pension and health spending
2. Growth-friendly tax reforms: creating a true business tax roadmap, that gives confidence over the taxation of capital and income in particular
3. Lower regulation: for example, removing rules that are holding back housebuilding, such as the requirement for a second staircase for smaller buildings
4. Lower employment costs: including ending the alignment of the youth minimum wage rate with adult rates, and looking again at the Employment Rights Act
5. Reduced electricity costs:  facilitating electrification and supporting UK competitiveness.

Five tests for a growth-first Budget

How far the Chancellor heeds business’s calls will be revealed on Wednesday, but as we digest the Budget and evaluate how far it delivers on ministerial rhetoric about growth, there will be five critical questions to bear in mind.

1. Does it make business more likely to invest? It is perhaps the central question for business: how do the Budget’s tax measures affect the investment that is essential to the UK’s future productivity and economic growth? We’ll be monitoring directors’ sentiment through the IoD Directors’ Economic Confidence Index, tracking views both before and after the Budget.
2. Does it reduce the costs of employment? Previous Budgets heaped costs on employment, discouraging employers from hiring new staff. The labour market has suffered as a result. Young people’s prospects have been hit particularly hard. We will be looking for measures that offset the damage done by previous measures such as the National Insurance Contribution increases, minimum wage rates and employment law reforms.
3.  Does it protect fiscal stability? The IMF has praised the UK’s “decisive” action to control government borrowing, but borrowing costs continue to rise. The immediate market reaction to the Budget will be important; so too will the OBR’s updated assessment of the trajectory for government borrowing.  
4.  Does it drive radical improvements in public sector performance? Under Andy Burnham, the government has outlined a number of long-term plans that offer long term benefit but carry significant up-front costs – such as rewiring the state. Yet the pressure on public finances requires radical changes in public sector productivity in the next two years. Without it, balancing the books will require significant cuts in public services.
5. Does it encourage UK businesses to unlock the AI opportunity? The IMF’s recent assessment of the UK’s economic resilience suggested that investment in AI was partly to credit for recent better-than-expected results. But global competition is only intensifying. Policy support for going further on safe AI adoption in the coming years will be essential to maintain the UK’s competitiveness.

Will the Chancellor deliver a truly growth-friendly Budget that supports those bloody-minded entrepreneurs? The tax burden on businesses and investors has increased in both the last two budgets and to get growth going, directors want to see that burden eased. A package which seeks to support entrepreneurship and scale-ups, and youth employment, will be considered against how the overall burdens on investment and hiring change.

The IoD policy team will of course be monitoring the Budget closely on Wednesday. Watch for our response here on the IoD website, in the media, and in next week’s Director Weekly.

A balanced scorecard for government

The IoD’s Balanced Scorecard for Government consists of 10 Key Performance Indicators that span critical areas for business confidence in the economy. Review our latest scores here.