By David Milliken and Andy Bruce
LONDON, Oct 28 (Reuters) - British finance minister John Healey offered cash to households hit by rising energy bills and help with fuel costs for drivers to guide the country through the "global economic storms" in the first budget of Prime Minister Andy Burnham's government.
Healey told parliament on Wednesday he would raise taxes on banks, gambling and income for savers and landlords while also tightening value-added tax rules for online marketplaces - such as Amazon
and eBay - to help fund the package and offer some property tax relief to small businesses.
Healey said the economy faced a hit from the conflict in the Gulf, which has driven up oil and gas prices, as well as from trade tensions and the war in Ukraine.
"Those are the storms we face. We can't wish them away. We must choose the course we steer through them," he said.
On entering Downing Street in July, Burnham promised "the biggest changes in the last 40 years" in British politics, including a bigger role for the state in the economy.
But Healey, a former trade union official, has to tread carefully to avoid piling more bond market pressure on Burnham's new government as borrowing costs rise globally.
His budget measures included a £100 ($133) payment to around 20 million households living in lower-valued homes to soften a leap in their energy bills, costing £2.6 billion.
Healey also said he would support drivers by keeping a freeze on the level of fuel duty rates, extending a five-pence temporary cut introduced in 2022 until at least July at a total cost of £1.4 billion over the period.
Britain's budget forecasters said the spending plans and the impact of higher inflation and borrowing costs would add £65 billion to borrowing over five years compared with their previous forecasts and slow the pace of fixing the public finances in the near term.
The Office for Budget Responsibility warned of tough economic times ahead with living standards set to fall in the near term before edging only fractionally above their level before the COVID pandemic by the end of the decade.
British 30-year government bond yields - a barometer of investor sentiment about the public finances - fell as Healey spoke and were down by as much as 5 basis points on the day at 5.691%, their lowest in more than a month.
"The market seems to be very happy with it, because the increase in inflation that's driving up debt servicing costs should be temporary," Andrew Wishart, senior UK economist at Berenberg, a bank, said.
"And also the giveaway to households is time-limited and partly offset by that higher tax on bank profits," he said.
The temporary increase in the surcharge on banks is estimated to yield £1.5 billion.
GROWTH DOWNGRADE FOR 2027
Britain's economy has withstood the energy price shock from the Iran war so far. But rising inflation - the OBR said it was on course to peak at 3.8% in early 2027 - and the prospect of higher interest rates are set to slow the economy next year.
The OBR said gross domestic product was on course to expand by 1.2% in 2026, up only slightly from a previous forecast of 1.1% it announced in March.
The OBR now expects GDP to grow by 1.0% in 2027, down sharply from its March forecast of 1.6%, before picking up speed again in subsequent years.
Healey said he would use some of his buffer for meeting his main fiscal target, which shrank to £15 billion from a previous £24 billion, but he said he would meet his commitments for repairing the public finances despite the Iran war shock.
"That's what a buffer is for. Use it when you need it. Rebuild it when you can," Healey said.
Measures announced prior to his speech in parliament included the removal of standing charges on gas bills which would bring down costs for most households. The Treasury has also announced tariff cuts on some imported goods including gherkins and marmalade.
More than £20 billion in extra support will go to state finance institutions to spur investment in artificial intelligence, defence and green energy by the early 2030s.
The speech included a commitment to give regional mayors more control over tax revenues, part of Burnham's high-profile devolution push.
Healey's biggest hope is for an end to the Iran war, which would lower the government's bill for servicing £3 trillion of public debt. That is on course to gobble up more than £14 billion extra in the current financial year, far more than any of the measures announced in the budget.
But bigger policy changes – including how to fix the inflation hit to public spending – are likely to have to wait for a 10-year plan that Burnham has said he will announce later this year and a broad spending review in 2027.
($1 = 0.7527 pounds)
(Writing by William Schomberg; Editing Toby Chopra)
