Prime Minister Andy Burnham and Chancellor John Healey (Image: Getty)
Cash-strapped households face a cost-of-living “triple whammy” set to continue well into 2027. Energy bills, mortgage payments and checkout prices are all set to soar. And experts are warning that the cost-of-living crisis that began in 2021 shows no sign of ending – and instead will get worse.
It means Chancellor John Healey faces a massive challenge as he prepares for this week’s Budget. Along with Prime Minister Andy Burnham, he wants to give people “breathing space” to help with rising bills. And just this week, a scheme to cut £150 off heating bills for every household on means-tested benefits came into effect. But the Government has massive debts, meaning it would be hard to find money for tax cuts.
Tom Wernham, senior research economist at the Institute for Fiscal Studies, said: “Household incomes have barely grown since 2019, and we’re not expecting a substantial uptick any time soon. The latest Office for Budget Responsibility forecasts from March predict incomes will grow slowly by historical standards in the coming years – less than half a percent annually – and they don’t yet take into account the hit to households’ purchasing power from the Iran war and the inflationary pressures it has contributed to.”
The Food and Drink Federation has forecast that food inflation will reach nearly 4% by Christmas and peak at 6.4% in July 2027, as a result of the conflict in Iran and the impacts of extreme weather on the global food supply chain, including El Niño and this summer’s droughts across the UK and Europe
Food prices have risen by nearly 40% since 2020. A £100 weekly shop in 2020 would cost nearly £140 today and will approach £150 by next summer.
Commodity prices have risen across the globe, with wheat up 45% in the past year, cocoa up over 100%, rice 60%, sugar 27% and coffee 22%.
The British Retail Consortium has also highlighted rising food costs, as well as higher electrical prices amid the ongoing AI boom, which is forcing up the price of memory chips and storage.
James Walton, chief economist at the Institute of Grocery Distribution, said: “Shoppers have already adapted to repeated periods of high food price inflation. Many have changed how and where they shop, switched products or reduced discretionary spend, leaving fewer options available to absorb any further price rises.”
Fruit and vegetables are expected to rise in price, reflecting their shorter production cycles and high sensitivity to weather. Other foods and non-alcoholic drinks are also expected to become more expensive.
Mortgage experts warned that interest rates are set to increase throughout 2027, leading to soaring monthly payments for many homeowners.
The average two-year fixed mortgage rate is already up by 0.89% since March, adding £131 to monthly mortgage repayments on a £250,000 mortgage repaid over 25 years.
But the Bank of England is expected to hike interest rates next year. And even the expectation of higher rates to come will lead to high street banks and building societies charging higher interest rates on they deals they offer, using a process known as “swap rates”.
Rachel Springall, Finance Expert at Moneyfactscompare.co.uk, said: “A second wave of mortgage rate hikes has begun from the major banks in reaction to growing concerns surrounding inflationary pressures.
“Swap rates have climbed, leading lenders such as NatWest, Santander, HSBC and TSB to increase selected fixed rates.”
While the Bank of England held interest rates steady in September, experts believe it could push them up in November, and may impose a series of rate hikes next year. This belief is already having an impact on mortgage rates, increasing monthly payments for homeowners on variable rates, or renewing fixed rate deals.
Regulator Ofgem has announced a 4% increase in the domestic energy price cap coming into effect in October.
Cornwall Insight’s new forecast (on August 26) shows no relief in sight for January, with bills forecast to rise a further 9% in the new year. This would put an average January bill up to £1,872 a year, £149 higher than the £1,723 October price cap announced in August. The January figure will not be confirmed until November.
Experts at Cornwall Insight predicted the average dual fuel energy bill will rise by 16% to £1,999 a year on January 1, up by £276 on the level between October and December and the biggest rise since January 2023.
The analysts said the increase is driven by the escalating conflict in the Middle East, which has disrupted gas supplies to the UK and worldwide as the vital Strait of Hormuz shipping route has been effectively closed since the Iran war began in February.
Dr Craig Lowrey, principal consultant at Cornwall Insight, said: “These prices are going to hit households hard.”
Voters fear the worst
New polling showed 44% of the public report feeling more fearful about how announcements in the upcoming Autumn Budget might impact their own financial situation. It revealed that eight in 10 Brits describe the current state of the British economy as poor.
Alex Bogdan, research director at Ipsos in the UK, said: “The Burnham Bounce may have provided a temporary cushion for the new Government, but this goodwill is not yet translating into an improved economic mood or ‘hope’ among households and businesses just yet.
“Brits remain deeply anxious about their personal finances and these underlying worries continue to dictate consumer sentiment where we see that expectations of higher energy bills and other cost-of-living factors already driving saving and spending decisions in people’s lives.
“While the Prime Minister and Chancellor enter their first major fiscal event with a degree of ‘breathing space’, voters simultaneously are demanding clear signals of improvement, without showing a clear willingness to accept painful compromises on tax, spending, or other economic trade-offs.”
The 3 Nightmares Haunting Andy Burnham and John Healey Before the Crunch Budget
Andy Burnham and Chancellor John Healey are approaching one of the most important financial tests of the new government, with millions of British households hoping that the upcoming Budget will finally offer relief from the relentless pressure on their finances. Yet the government faces a difficult balancing act: families want lower bills, businesses are demanding support, and public services need investment, while the national debt and rising borrowing costs leave ministers with limited room to manoeuvre.
Three major challenges stand out as the Budget approaches: the rising cost of living, the danger of higher borrowing costs, and the growing pressure to fund public services and national defence without breaking the government’s financial promises.
For Burnham, the stakes are particularly high. His arrival as prime minister raised expectations that a different political approach could deliver tangible improvements in everyday life. For Healey, the Budget represents an opportunity to demonstrate that he can translate those promises into a credible economic plan.
But expectations are running ahead of the money available, and the decisions made in the coming days could shape the government’s relationship with voters for months to come.
1. The Cost-of-Living Crisis Refuses to Disappear
The first major nightmare is the continuing pressure on household budgets. Although the most dramatic price increases of recent years have eased in some areas, families are still paying substantially more for essentials than they did before the cost-of-living crisis began.
Food, housing, energy and transport continue to absorb a large share of household income. For people whose wages and pensions have not kept pace with cumulative price increases, even a period of slower inflation offers little immediate comfort.
Food prices are a particularly sensitive issue. Households cannot simply stop buying groceries when prices rise, so increases at supermarkets quickly affect spending elsewhere. Families may switch to cheaper brands, reduce the amount they buy or abandon non-essential purchases, but these adjustments have limits.
The consequences are visible across the economy. When households devote more of their income to food, electricity and heating, they have less available for restaurants, holidays, clothing and other goods and services. Small businesses can consequently feel the effects of a crisis that initially appears to affect only household finances.
Energy costs present another concern. Wholesale prices remain vulnerable to international instability, while disruption to supplies and shipping routes can create additional uncertainty. Higher energy costs can also feed into the prices of manufactured goods, food production and transport.
The government has considered targeted assistance to help vulnerable households manage energy bills. However, ministers must decide how much support they can provide and how to pay for it without increasing pressure on public finances.
Burnham has emphasised the need to give families more breathing space, while Healey must work out which measures can be delivered within the government’s financial limits.
That creates a political dilemma. If the Budget offers too little help, voters may conclude that the government has failed to respond to their everyday difficulties. If ministers promise extensive assistance without a convincing funding plan, they risk undermining confidence in their wider economic strategy.
The challenge is to provide meaningful relief without suggesting that the government can eliminate every financial pressure immediately.
2. The Threat of Higher Borrowing Costs
The second nightmare concerns the cost of financing Britain’s public debt. Government borrowing is not simply an accounting issue: when investors demand higher returns to lend money to the state, the Treasury can face increased interest payments, leaving less money available for public services and investment.
Britain’s debt burden has already become a central issue in debates about taxation, public spending and economic growth. With public debt exceeding £3 trillion, ministers have limited freedom to make expensive new commitments without explaining how they will be financed.
The situation becomes more difficult when global events push up energy prices and inflation expectations. If investors believe inflation will remain elevated, they may demand higher yields on government bonds. Higher market interest rates can also influence the cost of mortgages and business finance, placing additional pressure on households and employers.
For Burnham and Healey, avoiding a damaging loss of market confidence is therefore essential.
The experience of the 2022 mini-Budget under Liz Truss remains a powerful warning in British politics. That episode demonstrated how quickly doubts about a government’s fiscal plans can trigger turmoil in financial markets, push up borrowing costs and undermine confidence.
The current government will want to avoid any suggestion that it is ignoring those risks.
Healey has indicated that financial discipline will remain central to his approach. The government is expected to work within the fiscal rules inherited from its predecessors, including commitments relating to borrowing and the public debt burden.
However, maintaining those rules while delivering new policies will be difficult. Economic growth may disappoint, inflation could remain stubborn, and international instability could increase the cost of government borrowing.
Every additional pound spent on debt interest is money that cannot be used for hospitals, schools, transport, housing or defence.
Ministers must also consider how businesses will react to tax changes. Measures that raise revenue in the short term could have unintended consequences if they discourage investment, reduce hiring or encourage companies to delay expansion.
The government therefore faces pressure from two directions. It must demonstrate that it is serious about controlling public finances, while avoiding a Budget so restrictive that it damages growth and weakens its own economic ambitions.
A credible plan will need to show not only how the government intends to balance its books, but also how its decisions can help create the conditions for stronger productivity and higher living standards.
3. Funding Public Services and Defence Without Breaking Promises
The third nightmare is the growing competition for public money.
Burnham has placed considerable emphasis on improving everyday services, addressing homelessness, strengthening social care and easing pressure on families. These are expensive commitments, and many require sustained funding rather than a single announcement.
Social care is particularly challenging. An ageing population creates greater demand for support, while shortages of staff and pressure on local authority budgets make the system difficult to reform. Without improvements, problems in social care can also affect the NHS, as people who no longer need hospital treatment may struggle to obtain the support required to return home.
Homelessness presents another financial and social challenge. Emergency accommodation can be expensive, while temporary solutions do not necessarily address the causes of housing insecurity. Preventing homelessness and expanding access to stable housing may require upfront investment, even if successful policies reduce costs over time.
At the same time, national defence has become an increasingly urgent priority.
Healey’s previous role as defence secretary placed him at the centre of disagreements over the resources needed to strengthen Britain’s armed forces. Defence spending commitments, equipment programmes and the need to improve military readiness will all compete with domestic priorities.
Britain has also faced pressure to establish a credible path towards higher NATO defence spending. Reaching ambitious targets will require difficult decisions about how additional funding is raised and which other priorities receive less money.
This is where the government’s political promises collide with financial reality.
Burnham has argued against treating welfare reductions as a simple solution to the country’s financial problems. Nevertheless, critics are likely to demand greater control over spending and a clearer explanation of how the government intends to fund its priorities.
Taxation is another sensitive issue. Labour’s manifesto commitments include promises not to raise the main rates of income tax, National Insurance or VAT. Those pledges restrict some of the most obvious options for raising additional revenue.
Healey could consider targeted taxes, changes to existing reliefs or measures designed to improve compliance. However, every proposal brings potential political and economic consequences.
A higher levy on particular industries might raise money, but businesses could argue that it discourages investment or ultimately increases costs for customers. Spending cuts might help protect the government’s fiscal position, but reductions affecting public services could undermine Burnham’s promise to improve people’s lives.
There is also a question of timing. Some reforms can produce immediate savings, while others require years before their benefits become visible. The government must decide how to address urgent pressures without abandoning longer-term plans.
The defence challenge makes those choices even more difficult. Voters expect the government to protect national security, but many also want better healthcare, affordable housing and relief from household bills. Ministers cannot assume that the public will accept cuts to one area simply because another has been declared a priority.
A Budget That Could Define the New Government
These three challenges are closely connected. Higher energy prices can push up inflation, rising inflation can increase borrowing costs, and higher debt-interest payments can leave the government with less money to support households or strengthen public services.
That is why the upcoming Budget will be about more than individual tax measures or short-term financial assistance. It will test whether Burnham and Healey can present a convincing explanation of how Britain should manage its finances while responding to the immediate concerns of ordinary people.
The government will need to be realistic about what it can afford, but realism alone will not satisfy voters. Families struggling with bills will want practical help, while businesses will seek stability and a clearer picture of the economic environment in which they must operate.
Investors, meanwhile, will be watching for evidence that the government can maintain control over borrowing and deliver its financial commitments.
Burnham must also consider the political consequences of the decisions made by his chancellor. A Budget that disappoints voters could weaken the goodwill surrounding the new administration. A plan that promises too much without a credible funding strategy could create a different set of problems.
Healey’s task is to find a path between those risks. He must provide enough support to demonstrate that the government understands the pressures facing households, while preserving the financial credibility needed to fund investment and maintain confidence.
There is unlikely to be a simple solution. The cost-of-living crisis cannot be reversed overnight, public debt cannot be ignored, and defence and public services cannot be strengthened without difficult choices.
Ultimately, the success of the Budget will depend on whether the government can turn its promises into a practical programme with clear priorities, believable funding and measurable results.
For millions of Britons, the most important question is straightforward: will the decisions announced by Burnham and Healey make everyday life more affordable?
For the government, the answer could determine whether its early political momentum develops into lasting public confidence—or whether the same economic frustrations that have troubled previous administrations begin to haunt this one as well.