After sweltering, along with the rest of us, through a spring and summer of record temperatures, including five heatwaves, it might be expected that the new chancellor, John Healey, would use his first budget to invest heavily in fighting climate change and preparing the UK for its consequences. Alas, the relative cool of autumn has seen the government’s attention drift to other matters.
The prime minister clearly takes climate change seriously and his Manchester mayoralty boasted a good record on the environment. But Andy Burnham has made clear that his priorities in No 10 lie elsewhere, in social care, housing and youth unemployment.
Tackling these thorny issues, as well as meeting a pledge to raise defence spending to three per cent of GDP by 2030, will be both complex and expensive and are likely to dominate the government’s agenda in the runup to the next election.
On top of this, the Treasury’s financial room for manoeuvre remains extremely tight. Although the economy has picked up steam recently, any resulting boost to tax receipts looks set to be wiped out, by higher inflation and soaring borrowing costs sparked by high energy and food prices arising from turmoil in the Persian Gulf.
As a result, John Healey is expected to pay for any giveaways in the budget with higher taxes or spending cuts, rather than increasing borrowing. Likely giveaways include a targeted package to help households cope with higher fuel bills over the winter, as well as ditching a planned and overdue increase in fuel duty by 3p a litre in January and 2p in March.
Other tax breaks reportedly being considered include taking green levies off energy bills and funding green infrastructure through general taxation instead. This would be a very good move to cushion households from an expected £400 rise in annual fuel bills next year and also helps protect lower income households. However, it requires up to £3 billion of tax rises or spending cuts elsewhere. Industrial energy users face similar pressures on their electricity bills with a large swathe not qualifying even for the lower rate British Industrial Competitiveness Scheme relief.
With most of the mooted tax rises, such as a ‘Mansion Tax’ levied on expensive properties, and equalising Capital Gains Tax on the sale of assets with income tax, looking to have been ditched, that leaves few options for the government besides spending cuts.
Where will the axe fall?
Major tweaks to the budgets of spending departments will probably have to wait until the upcoming spending review, likely to be unveiled alongside 2027’s budget. The agricultural budget’s future will be a major concern for environmental priorities at that point. But there is always scope for salami-slicing across Whitehall.
The Department for Energy Security and Net Zero was a major winner from the 2025 spending review, so its capital budget may be vulnerable in the hunt for savings this time. That review saw £9.4 billion of cash committed to a second tranche of carbon capture and storage (CCS) projects, including new support for the Viking and Acorn clusters in Humberside and Aberdeenshire.
The government is reportedly having second thoughts about this CCS funding, but it needs to be careful. To avoid undermining investor confidence and the jobs it has protected and will create, ministers should recommit to the first tranche of CCS projects. The government could look at other ways of funding the next tranche and target taxpayers’ money instead towards solutions like solar panels and industrial heat pumps that help break the link with volatile fossil fuels, reduce the need for CCS and bring wider benefits, such as better efficiency and air quality.
Rumoured cuts to domestic heat pump grants are sending out the wrong signals about the government’s commitment to home decarbonisation. The longer term resilience and cost benefits of electrifying the economy and insulating our homes mean the government should also reaffirm its commitment to the Warm Homes Plan. This should include fast tracking promised grants and loans to help households install solar and batteries, aligned with measures to avoid homes overheating, such as integrated cooling standards and low cost solutions like shutters and blinds.
Climate action is economically rationale
Wrangling over tax and spending decisions should not distract from the fact that the consequences of a fast heating climate and the super El-Niño are likely to mean a damaging winter ahead and even more extreme temperatures next summer and beyond. Rising economic costs from climate change are one of the biggest long term threats to the economy and the stability of the public finances. It is economically rational to mitigate and prepare for the harm.
Investing now will save money in the future, and it is vital that the government continues to take a long term view of the payoffs of earlier climate action. For example, increased investment in flood defences, in line with the Climate Change Committee’s recommendations, would cost an extra £1.6 to 2.2 billion a year. But every £1 the government spends on flood prevention prevents £8 worth of damages, £3 of which is a direct saving for the government.
Other options will cost little. For instance, the government should move responsibility for adaptation and resilience from the Department for the Environment, Food and Rural Affairs into the Cabinet Office, and it should also clarify the future of FloodRe, the public backed insurance scheme for areas vulnerable to flooding, as soon as possible. Beyond the budget, the Treasury should apply an adaptation test to its spending on major projects, to ensure they are resilient for the future.
Andy Burnham’s government has transformative aspirations for the economy and social justice. But it should not let political and economic expediency distract it from what climate change means for these aspirations, and its responsibility to protect people and the businesses now and in the future.
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