UK Budget 2026: Healey Funds Defence Push as Debt Interest Squeezes Finances

Britain’s 2026 Budget, delivered to the House of Commons on Wednesday, Oct. 28, by Chancellor John Healey, tried to do two hard things at once: pay for a bigger military and keep borrowing on a downward path while interest bills climb. The Office for Budget Responsibility (OBR), the government’s independent forecaster, said the plans meet the main fiscal rule, but with a thinner cushion than in the spring.

The result is a Budget shaped by pressure from two directions. NATO allies have committed to spend far more on defence over the next decade, and the war in Ukraine continues to pull on British resources. At the same time, higher gilt yields and stubborn inflation have pushed up what the Treasury pays to service a national debt that is close to the size of the whole economy. According to the BBC, it was the first Budget since Andy Burnham became prime minister.

Pressure to spend more on defence

Healey, who served as Defence Secretary before moving to the Treasury, put the military at the center of his speech. “In this new era of threat, the demands on our UK defence are rising,” he told MPs, according to the official Hansard record. He said the defence budget this year is £14 billion higher than in the previous Conservative government’s final year.

The Budget confirmed full funding for the £15 billion Defence Investment Plan covering 2026-27 to 2029-30. The government had announced the plan in June with £10.3 billion of identified funding. HM Treasury said the remaining £4.7 billion will come from cutting other departments’ capital budgets by a further 1% from 2027-28 to 2029-30, which raises £3 billion, plus £1.7 billion of unallocated contingency from the Treasury’s capital reserve.

The bigger question is the NATO commitment. Britain has pledged to spend 3.5% of GDP on core defence by 2035, and the Budget added a target date of 2030 for reaching 3%. Healey said details of how the government will get there will come at next year’s Spending Review. The OBR estimated that the extra 0.9% of GDP needed by 2035-36 would cost around £35 billion a year in 2026-27 terms, and it said it will include the full fiscal effect only once those spending decisions are made.

To close part of the gap without new taxes, the Treasury is turning to outside money. The Budget launched an Innovative Defence Finance Taskforce, said the National Wealth Fund and British Business Bank will deploy up to £5 billion over four years into defence, dual-use and resilience sectors, and confirmed treaty talks on a multilateral defence bank with Finland, Poland and the Netherlands. Ukraine gets more than £10 billion in additional economic and military support, including £0.5 billion in urgent military funding for this winter, on top of an existing £3 billion a year. For the battlefield picture, see our latest Russia-Ukraine war report.

The financial strain

The OBR’s October outlook describes a “moderate deterioration in the medium-term fiscal outlook, primarily due to the impact of higher debt interest costs.” Borrowing is higher than the March forecast in every year, by about £18 billion this year and £16 billion in 2027-28. Before the Budget’s measures, debt interest alone was £15 billion higher this year than expected in March, which the OBR attributes to higher inflation raising the cost of index-linked gilts. It also said gilt yields “have risen substantially across all maturities” since March.

The government’s main fiscal rule requires day-to-day spending to be covered by revenue in 2029-30. The OBR says that rule is met with £15 billion to spare. Reuters reported that the OBR had put that headroom at £24 billion at former Chancellor Rachel Reeves’ March update. The House of Commons Library notes that about £1 in every £13 the government spends now goes on debt interest, and that debt interest spending has more than doubled since 2019-20.

To keep the numbers working, the Budget raises taxes in targeted areas. According to the BBC’s summary, they include an extra 2% tax on savings and property rental income from April, a temporary rise in the bank surcharge from 3% to 6% for 15 months, and a higher tax rate on some gambling machines. The Treasury also said not every department should expect real-terms increases at the next Spending Review.

What the data shows

On the OBR’s assumptions, defence spending rises from 2.6% of GDP in 2026-27 to 2.7% in 2029-30, then to 3.0% in 2030-31 and 3.1% in 2031-32. That leaves a gap of 0.4 percentage points still to close in the final years before 2035, by TBR’s calculation from the OBR figures. Most of the climb, 0.4 points, is planned for after 2029-30, past the end of the current spending plans.

The second chart shows the squeeze. Net borrowing is forecast to roughly halve, from £134.3 billion in 2025-26 to £68.3 billion in 2031-32, a drop of 49%. Over the same period, central government debt interest (net of the Bank of England’s asset purchase facility) rises from £108.7 billion to £160.0 billion, up £51.3 billion or 47%, by TBR’s calculation. From 2027-28 onward, the government is forecast to spend more on interest than it borrows. Public sector net debt is forecast to peak at 97.3% of GDP in 2028-29 before easing to 95.6% in 2031-32.

What comes next

The OBR expects growth of 1.2% this year, slowing to 1% in 2027, and inflation averaging 3.1% this year and 3.4% next year before returning to the 2% target in 2028, according to the BBC’s summary of the forecasts. The next major test is the 2027 Spending Review, where the government says it will show how it will fund the path to 3.5% of GDP on defence. The OBR warns that its borrowing forecast is highly uncertain: it puts a 60% chance on 2031-32 borrowing landing anywhere between a surplus of 1.0% of GDP and a deficit of 4.4%. Defence and fiscal policy are also on the agenda among allies this week, as our G20 Atlanta live coverage and our Oct. 29 geopolitics and business report show.

Sources

• HM Treasury: Budget 2026 document
• HM Treasury: Budget 2026 press release
• Office for Budget Responsibility: Economic and fiscal outlook, October 2026
• Hansard: Financial Statement and Budget Report, Oct. 28, 2026
• House of Commons Library: Autumn Budget 2026 background briefing

Additional sources

• BBC News: Budget 2026 key points at a glance
• Reuters via Investing.com: Healey says UK will have £15 billion of fiscal headroom
• House of Commons Library: Autumn Budget 2026 research hub