The last time Britain had a chancellor called Healey, the country was grappling with a US president fighting an unpopular foreign war, high inflation from a Middle East oil shock and a fiscal deficit. When Chancellor of the Exchequer John Healey stands up to deliver his first Budget next week, the echoes of the 1970s will be inescapable.
In 1976 the crisis of confidence in the UK’s ability to balance its books and bring down inflation was so severe that foreign investors ceased investing in the UK and then chancellor Denis Healey was forced to beg the International Monetary Fund (IMF) for a loan.
While nowhere near the same scale, it’s those same bond market creditors the current Chancellor needs to keep sweet as the UK competes for investment across world markets that have been dumping gilts amid concerns about rising inflation, juggernaut deficits and competing demand for capital from technology companies hungry for a debt-fuelled AI spending binge.
With Government borrowing at a record high of £3trn and the UK paying more than its peers to borrow, when he takes to his feet in Parliament on Wednesday lunchtime, Healey needs to stick within the fiscal guardrails and avoid creative accounting that would rile investors. No “defying” the bond markets as his boss, the Prime Minister Andy Burnham, once had it.
‘We are heading for a holding Budget’
Simultaneously, the Chancellor will seek to support voters and small businesses with living costs, despite being limited by tight public finances and Labour’s 2024 manifesto that forbids significant tax rises. Attempting to square the circle will result in a string of strictly short-term handouts while hoping Donald Trump’s war in Iran ends sharpish.
On Wednesday, the impact of the Middle East conflict became clear as the rate of UK price increases sped up to 3.5 per cent in the year leading to September, driven by steep rises in petrol and diesel costs.
With Healey’s flexibility restricted, expensive choices about meeting Nato’s calls for increased defence spending or addressing ballooning welfare costs have been deferred to next year’s spending review, potentially as late as November.
“What we are headed for is a holding Budget; it’ll be a massive shock if we get anything else at this point,” Tom Pope, chief economist at the Institute for Government think-tank, told The i Paper. “Big decisions on defence and welfare have been pushed into next year. They’re keeping the good vibes going, but you can only do that for so long before difficult decisions have to be made.”
Healey appears fully signed up to Burnham’s nostalgic 1970s community socialist vibes. As well as formal meetings, the pair have discussed the Budget over pints and curry. Even so, the chancellor must show he understands how Burnham’s reindustrialisation strategies marry modern concerns such as AI and sustainable environmental technologies.
Fiscal wriggle room
During his speech at the Labour conference, Healey pledged “fiscal discipline,” though this doesn’t imply he will restore the headroom buffer previously held by his predecessor Rachel Reeves. Estimates suggest the global increase in borrowing costs may have reduced the £23.6bn shock-absorbing buffer for Labour’s primary fiscal rule by half, ensuring day-to-day spending is covered by tax receipts by the end of the Parliament.
Healey knows restoring too much headroom too quickly risks sapping the economic growth the Government is trying to encourage. And meanwhile investors seem tolerant of a smaller cushion in a world where no one knows how the Iranian instability will carry on.
“They don’t need to fully rebuild the headroom because the Iran current energy shock is a one-off event. We don’t want to get to a situation where the headroom has to be at a defined amount otherwise it becomes a de facto additional fiscal rule,” UK chief economist at the Boston Consulting Group Raoul Ruparel told The i Paper. “I think anywhere between £10bn-£15bn is manageable and some of that will be built on the back of better tax receipts because of inflation,” Ruparel added.
Government insiders said Healey doesn’t want to commit to major new tax hikes or spending cuts now when an improving economic picture from 2027 onwards might render them unnecessary. Instead, this Budget is designed to protect existing stability and offer targeted support. Any economic boost will come from sweeping away regulations on firms.
The Chancellor giveth and the Chancellor taketh away
“All the signals point to John Healey offering short-term cost of living help, wrapped in a narrative that the ‘bad guys’ are paying for it, chiefly the highly profitable banks and gambling companies,” said Cameron Brown, a former Treasury adviser to Conservative chancellor Jeremy Hunt.
“Labour MPs will welcome it, of course, but it won’t be radical. He simply doesn’t have the room,” he added.
Giveaways could include more support for energy costs this winter, including through an expansion of the warm homes discount, which currently grants a yearly £150 energy bill rebate to households receiving a qualifying means-tested benefit. Healey could likewise extend a freeze on fuel duty in a boost for millions of motorists or allow a temporary cut to VAT on petrol.
Thousands of high-street shops, cafés, pubs and other small businesses will no longer have to pay business rates if Healey presses ahead with an increase in the threshold. Platforms like Amazon and eBay will be tasked with gathering tax payments from all sellers on their sites to support lowering rates for smaller retailers.
Healey is also likely to reverse a 2023 Tory move to cut a bank surcharge on corporation tax that lowered it to 3 per cent from 8 per cent amid record pre-tax profits, driven by higher interest rates that widen the gap between what banks charge borrowers and pay savers.
Gaming firms are ready for an increase in machine games duty from 20 per cent to 25 per cent. Although a hike was recommended by former prime minister Gordon Brown and is popular with morality campaigners in the Labour Party, any increase is likely to cause more job losses and the closure of betting shops. Labour MPs will struggle to justify the closure of bingo halls if they are affected by the tax increases.
“There is no such thing as a victimless Budget,” according to one former Labour Treasury official. “It’s just about what you can sell to the PLP [Parliamentary Labour Party] and the country.”
Military-style security in the Treasury
Last year’s leaks and pitch-rolling unsettled bond markets and fuelled a story of dysfunction. According to Treasury sources, the economic impact could have reached billions because of public concern about Rachel Reeves’s Budget.
To help steady the process, Healey requested the Office for Budget Responsibility to supply a baseline forecast before the 10-week budget process started earlier this autumn. Previously, the Treasury had to wait about two weeks for the fiscal watchdog’s initial economic forecasts, leaving only eight weeks before the Budget and rushing to compare requests with the expected headroom.
Within the Treasury, strict control is maintained over the digital copy of the Budget’s so-called Red Book containing tax and spending measures. The i Paper disclosed that Healey, previously defence secretary, implemented a military-style security system where Treasury officials signed into their document sections and could not access others.
On this occasion, both industry lobbyists and MPs have largely been left uninformed, missing the typical hints and signals that usually precede the Budget.
“I’m not expecting any [former Tory chancellor] George Osborne-style rabbit out of hats. Even the people who have been going in to see him aren’t leaking. He’s keeping his cards close to his chest and that suggests to me nothing massively radical is in it because you would have to consult on big changes to see how they rub against the real world,” a senior Labour MP told The i Paper.
‘The banks had forgotten this is a Labour Government’
A highly vocal lobbying campaign by the big banks against higher taxes, including from JP Morgan’s Jamie Dimon, played out through the press and appeared to have the opposite effect of the one intended. “Why do we give these people face time if all they do is slag us off to the media?” questioned one Treasury source.
“I think the banks had forgotten this is a Labour Government,” echoed a Labour MP.
There may be consequences. Dimon has warned that imposing a windfall tax solely on British lenders and exempting international banks would be unfair and has threatened to reconsider plans for a new London HQ if the UK becomes “hostile” to lenders again.
Andrew Bailey, Governor of the Bank of England, said in June that any attempt to punish lenders would cause mortgage rates to rise and might destabilise the sector, since shareholders would be reluctant to provide capital for growth to banks only just coming up for air after the 2008 crisis.
It was a point echoed by Conservative leader Kemi Badenoch in a news conference on Tuesday. “Taxing banks may seem harmless to Labour MPs. I’m sure they’d even enjoy it, but here’s what it will mean. Higher mortgage rates when you buy your home, higher interest rates for businesses taking out a loan. It will mean fewer jobs, not just jobs in banking,” she said.
Expecting a damp squib
Even if taxing the banks will raise a cheer on the Government benches in Parliament, some MPs are predicting a damp squib on Wednesday. “I can deal with boring. In fact, I’d welcome it,” a loyal Government minister insisted to The i Paper.
But there are also Labour MPs who are worried it will be a missed opportunity to set out a radically different agenda to Sir Keir Starmer and Reeves. “Is all we can expect pain deferred ‘til another day?” questioned one Labour MP. Another mischievously pointed out that the same IMF that bailed the UK out in the 1970s was full of praise for Reeves for striking “a good balance between deficit reduction and growth-friendly spending.”
Many anticipate the Chancellor will elaborate on Burnham’s plans for devolution following the transfer of economic growth policy responsibility from the Treasury to No 10 North.
But Labour MPs may also be frustrated that Healey is set to keep capital gains tax as it is, while they advocate for increased taxes on the wealthy. Treasury officials think the current rates generate the highest revenue and altering them might decrease income, and Healey feared, have a chilling effect on business investment.
Bored Labour backbenchers chat about early election
There are also those convinced radicalism can only come from breaking with Starmer’s 2024 manifesto, which rules out a rise in income tax, VAT and workers’ national insurance contributions, which would require a fresh mandate from the public. Some – possibly underemployed – backbench Labour MPs speculated in Parliament’s tearoom this week that the Prime Minister would call an election as soon as the week after the budget.
Those close to Burnham have spent months trying to shut down the idea of an early election, only for it, whac-a-mole, to pop up again. “Andy is very excited about the 10-year-plan,” said one ally of the Prime Minister, wearily dismissive of Labour backbenchers’ speculation. This extensive vision for the transformation of the UK is expected to be published in late November or early December.
Healey keeping his head down
Recent history offers Healey lessons: the spectre of former Prime Minister Liz Truss’s misnamed “mini Budget” shows the potential for a fiscal event to spiral out of control. So can anyone blame Healey for keeping his head down? From Washington to Paris, gilt markets are turbulent. Trump will likely keep the Iran War going beyond the US midterms next month.
“I have a huge amount of sympathy for Healey because he’s locked in on every side. Economic policy has been taken over by the Prime Minister, run in part through his satellite office in Manchester,” Hunt’s adviser Cameron Brown said.
“Behind him sit MPs with no appetite for spending restraint. And in front of him are the bond markets, already charging the country a premium every time we borrow. Cutting spending is politically challenging, so he’s left scraping around for revenue raisers, and there aren’t many left to scrape,” Brown added.