UK Chancellor Healey Cuts Energy Bills, Taxes Banks, and Pledges Billions for AI and Defense

U.K. Chancellor John Healey delivered his first Autumn Budget on Wednesday, announcing a broad package of cost-of-living relief, AI investment, and defense funding, while raising a bank surcharge to help cover the bill.

The budget arrives against a difficult economic backdrop. Inflation climbed to 3.5% in September, driven largely by surging fuel costs, and markets expect the Bank of England to raise interest rates next month. Government borrowing costs have also risen sharply this year.

Healey framed the package as necessary relief for households, telling lawmakers the country needs "radical change on energy" and citing the inflationary impact of the U.S.-Iran war — a conflict he said "we did not want."

The cost-of-living measures include the removal of standing charges on household gas heating bills, an extension of a tax break on electricity for millions of households through July 2027, and £100 ($133) direct checks for residents in the four lowest local housing tax bands. The combined cost of those measures amounts to £2.6 billion. Tariffs will also be removed on more than 100 grocery products, a policy Healey had previewed before Wednesday's formal announcement.

Small business relief from business rates will be extended to cover more firms in the hospitality, retail, and leisure sectors. The U.K.'s minimum wage will rise by 3.9%, and a planned reduction to tax-free savings thresholds was canceled.

Healey said he would also pursue reforms to pensions and sickness benefits to bring down the welfare bill, which reached 10.7% of U.K. GDP in 2024/25 — though he said he would not "write off a million young people [or] see disabled people suffer the indignities of a system that has been found 'not fit for purpose.'"

On artificial intelligence, Healey announced hundreds of millions of pounds in funding for AI security and sovereignty. "Nowhere is the necessary role for the state clearer than in artificial intelligence," he said. He also unveiled a "covenant" for data centers operating in the country, setting out conditions around community investment, local job creation, and water supply protections, in exchange for guaranteed grid connections and, where necessary, permission to build onsite generation capacity.

Tax breaks for founders were also included, among them a reduced capital gains tax rate on gains of up to £10 million. Additional funding will flow to regional innovation hubs, Healey said, to "unleash Britain's innovation power."

The defense component of the budget was substantial. Healey announced £10 billion in additional economic and military support for Ukraine, saying the move sends "a clear message to Moscow." He also committed to presenting a plan — at next year's Spending Review — for meeting a NATO defense spending target of 3.5% of GDP by 2035, with an interim target of 3% by 2030.

To fund the package, Healey said he would raise revenue "from those who can afford to pay," singling out banks, gambling businesses, and vape retailers. The bank surcharge will rise by 3 percentage points, bringing it to 6%. Healey, who earlier this month called Britain's banks the "jewel" in the country's economic crown, said he was asking them to fund the "breathing space" for British households. The measure is temporary and takes effect in January.

Healey said his plans comply with the fiscal rules set by his predecessor, under which day-to-day spending must be covered by tax revenues rather than borrowing, and debt must be declining as a share of GDP. The Office for Budget Responsibility projected £15 billion in fiscal headroom by the 2029/30 financial year, and forecast national debt rising slightly to 83.8% of GDP next year before declining to 81.7% by 2032.

The OBR also revised its growth forecast upward, projecting U.K. economic expansion of 1.2% this year, 1% in 2027, and 1.6% in 2028. Markets responded with measured relief — yields on benchmark 10-year gilts fell 2 basis points to 5.323% as Healey spoke, though sterling slipped marginally against the dollar and fell 0.2% against the euro.

With the Bank of England expected to act on rates next month and the Spending Review still ahead, Wednesday's budget sets the political and fiscal terms on which Prime Minister Andy Burnham's government will be judged heading into 2027.

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