Healey’s first UK Budget keeps gilt market calm as banks pay more tax

What happened

Healey told Parliament that households in council tax bands A to D, about 20 million of them, will get a £100 energy payment this winter, a £2.6bn scheme. He also extended the VAT cut on electricity and the 5p fuel duty cut to July, and said standing charges will be removed from household gas bills next year. To help pay, banks face an extra 3 percentage points on the bank surcharge, lifting it to 6%, from January for 15 months. The Financial Times (FT) reported the Budget passed without a bond market wobble, with gilts holding on to gains made before the speech.

What it means

The bond market was the audience that mattered most. UK borrowing costs are high: the 10-year gilt yield touched 5.527% in early October, a 19-year high according to LSEG data cited by Dow Jones. Healey said the Office for Budget Responsibility (OBR), the official fiscal watchdog, now expects the government to spend £14bn more on debt interest this year. Investors wanted proof that the new chancellor would not borrow his way out of the energy shock.

He gave them that. Healey said he meets both fiscal rules: day-to-day spending covered by tax receipts, and debt falling as a share of GDP. Headroom, the buffer against those rules, is £15bn in 2029/30, rising to £22bn the following year. That matched what analysts had expected, though it is smaller than the cushion forecast in March. The OBR also lifted its growth forecast for 2026 to 1.2%, while cutting 2027 to 1%, according to Investing.com.

Markets reacted with something close to a shrug. Reuters reported the 10-year yield fell about 2 basis points to roughly 5.32% and the 30-year yield dropped 3.5 basis points. The pound slipped 0.1% against the dollar to around $1.33 and 0.2% against the euro. Kathleen Brooks of XTB told Reuters the bond market saw it as "a very boring budget", which in this setting counts as praise.

The other money stories sit with banks and savers. Lenders had feared a bigger hit, and Lloyds, Barclays and NatWest shares rose after the speech, although reports of the size of the gains differ, from about 1.3% to more than 3%. Healey also raised tax rates on property and savings income by two percentage points from April 2027, kept the £20,000 cash ISA limit and introduced a 10% capital gains rate for founders on lifetime gains up to £10m. Attention now moves to the Bank of England, which is widely expected to raise rates next week to tackle 3.5% inflation.

The bull case

Sticking to the fiscal rules and matching headroom expectations removes a key worry for gilt investors, and yields drifted lower rather than spiking. The OBR raised its 2026 growth forecast, and Healey's figures show borrowing shrinking each year. For banks, the surcharge is temporary and smaller than feared, which one Shore Capital analyst described as a modest earnings headwind rather than a change to the investment case.

The bear case

The fiscal cushion is thinner than in March, and debt interest costs keep climbing, leaving little room if energy prices rise again. The Debt Management Office raised its 2026-27 financing need to £258.6bn, meaning more gilt supply. The OBR also cut its 2027 growth forecast to 1%. A widely expected Bank of England rate hike could keep borrowing costs high regardless of the Budget's calm reception.