UK Budget Cuts Energy Costs, Raises Bank Surcharge and Lifts Defense Spending Plans

John Healey, the U.K.'s finance minister, presented his first fiscal budget on Wednesday, setting out funding for defense and artificial intelligence alongside measures meant to ease cost-of-living pressures. The Autumn Budget contained dozens of policies, though Healey took care not to provoke a negative reaction from financial markets, which responded broadly positively.

The backdrop is difficult. As a net energy importer, Britain is exposed to external energy shocks, and surging fuel costs pushed annual inflation up to 3.5% in September. Markets expect the Bank of England to raise interest rates next month, and government borrowing costs have climbed sharply this year. Healey said the country needs "radical change on energy" and pointed to the inflationary effect of the U.S.-Iran war, a conflict he said "we did not want."

To provide what he called "breathing space" for families, Healey announced the removal of standing charges on household gas heating bills and an extension of an electricity tax break for millions of households through July 2027. People in the four lowest local housing tax bands will receive £100 ($133) checks, at a cost of £2.6 billion. Tariffs will be dropped on more than 100 grocery products, a move disclosed before the formal budget statement. Business rates relief for small firms will be widened to cover more companies in hospitality, retail and leisure.

Other measures included £15 million for children's books, funding to reduce homelessness and support for first-time buyers. The minimum wage will rise by 3.9%, and a planned cut to tax-free savings thresholds was canceled. Healey also pledged to bring down the welfare bill through reforms to pensions and sickness benefits, but said he would not "write off a million young people" or let disabled people suffer under a system found "not fit for purpose." Welfare spending reached 10.7% of GDP in 2024/25 and has been contentious, with predecessor Rachel Reeves softening her own cuts after a rebellion within her party.

On technology, Healey announced hundreds of millions of pounds for AI security and sovereignty, saying "nowhere is the necessary role for the state clearer than in artificial intelligence." A new "covenant" for data centers will require them to meet strict tests on investing in local communities, creating jobs and protecting water supplies. In return, critical facilities will get grid connections and, where needed, permission to build onsite generation. Founders will get a reduced capital gains tax rate on gains of up to £10 million, and regional innovation hubs will receive extra cash.

On security, the budget includes £10 billion of additional economic and military support for Ukraine. "Britain will stand with Ukraine for as long as it takes," Healey said. He promised to detail at next year's Spending Review how the U.K. will reach NATO's goal of spending 3.5% of GDP on defense by 2035, with a target of 3% in 2030.

To pay for the package, Healey said he would raise revenue "from those who can afford to pay," with no tax rises on wages or dividends. Banks, gambling businesses and vape shops will be taxed. The bank surcharge will rise by 3%, to 6%, as a temporary measure starting in January and ending 15 months later. The increase was less severe than some in the sector had feared, and shares in Barclays, Lloyds Banking Group and NatWest rose between 2.5% and 3.3%.

JPMorgan Chase said singling out the industry for more taxes "lacks principle." CEO Jamie Dimon has previously suggested the bank may rethink its London headquarters buildout at Canary Wharf if the government is "hostile" to banks. The company said on Wednesday it remains "committed" to the U.K.

The Office for Budget Responsibility forecast £15 billion of fiscal headroom by 2029/30 and said Healey's plans meet the existing fiscal rules. It expects debt to edge up to 83.8% of GDP next year before falling to 81.7% by 2032, and projects growth of 1.2% this year, 1% in 2027 and 1.6% in 2028. Gilt yields fell as Healey spoke, with the 10-year yield 2 basis points lower at 5.323%, while sterling slipped slightly against the dollar and 0.2% against the euro.