Andy Burnham – and the Labour Party – have been riding high ever since he barged Sir Keir Starmer aside to take the controls of Britain in July.
A host of popular, if small, cost of living measures, a barnstorming speech at Labour’s annual conference and Labour taking a lead in the polls for the first time in more than a year have all seen spirits soar after the gloom-laden days of Starmer and his Chancellor Rachel Reeves.
Now, however, there are said to be fears in Downing Street that next week’s Budget by Reeves’s replacement at the helm of UK PLC, John Healey, could see the feelgood factor come crashing down – and spell the end of Burnham’s honeymoon period.
Healey will deliver his first Budget as Chancellor on Wednesday, three months after Burnham replaced Starmer as Prime Minister.
The pressure is on – after all, this is the man who quit Starmer’s cabinet over the lack of defence spending, tipping the former PM over the edge.
But the soundings from Downing Street seem to indicate that having looked at the books there is only one conclusion the new Chancellor could draw – Britain is in a tight spot financially and there is very little room for the spending Labour MPs crave.
A former Labour minister said: “They are worried the Parliamentary Labour Party are going to kick off because there are such high expectations for change and yet it might not deliver anything.
“Labour backbenchers have been cutting the new prime minister a bit of slack, but there is a sense this is life now and they might not continue to be so forgiving.”
What might be in the Budget?
Healey’s first Budget will be constrained by high borrowing costs, dwindling financial headroom, or buffer, and manifesto promises that are tying his hands.
Before becoming Labour leader, Burnham committed to Labour’s fiscal rules, which require day-to-day spending to be covered by taxation rather than borrowing, and debt to fall. He also double-ticked the 2024 manifesto pledge not to raise income tax, national insurance or VAT.
As a result Healey has signalled a “nothing to see here” Budget, with no big tax raid and no large giveaways. He has said it will give households and businesses “a bit of breathing space” on energy costs.
That raises the question of what the point of ousting Rachel Reeves was. Reeves was removed as Chancellor in July after two Budgets that raised taxes and left her with record-low approval ratings.
Many Labour MPs who backed the change of leader expected – hoped for – a different economic approach.
Instead, Healey is working within the same fiscal rules and tax commitments as his predecessor.
Burnham has made the cost of living his top priority, but the Chancellor has limited options for raising money or giving anything away.
Tax rises ruled out
Several tax rises have already been ruled out. The i Paper revealed last week there will be no changes to capital gains tax, despite pressure from senior Labour MPs to raise it.
A proposal to lower the threshold for Reeves’s mansion tax from £2m to £1.5m is also understood to have been dropped after objections from London Labour MPs, fearful of voters on middle incomes living in small houses valued at more than this.
Business sources also expect Healey to pause plans to bring the minimum wage for people 18–20 into line with the rate for over-21s.
But there are concerns in government that rapid increases in the minimum wage have cost jobs, particularly for young people, thus contributing to the problem of young people who not in employment, education or training.
Businesses also complain that with Rachel Reeves’s hike to employers national insurance in 2024 it is becoming too expensive to employ people.
One business source said the government was “pushing back the timeline” on the minimum wage pledge.
“It was due to hit by 2029 and now is open ended,” they said.
A second source said the manifesto commitment meant the policy was unlikely to be dropped altogether: “I think they’d pause rather than scrap.”
They added equalisation would undermine Burnham’s aim of moving young people off health-related benefits and into work.
“You’re moving people out of inactivity and into unemployment, because no one’s hiring them still,” they said.
A third business source said: “It’s just a sensible and pragmatic thing to do.”
The Low Pay Commission, which sets minimum wage recommendations, has the remit for aligning the wages. It had initially targeted to do so by 2028/29 – but only “subject to economic conditions and Government policy towards young people at the time”.
The pension problem
Business sources also think Healey could announce new tax incentives for entrepreneurs following a Treasury call for evidence on “tax support for entrepreneurs”, which closed at the end of February.
The focus on entrepreneurship comes as the Government looks to help young people earn money through “side hustles”, with Work and Pensions Secretary Pat McFadden announcing a £5m scheme offering jobcentre coaching to young people selling clothes online or creating YouTube content, as part of efforts to reduce the benefits bill.
Another measure being discussed include an extension of the Great British Summer Savings scheme into the winter holidays. The summer scheme cut VAT on children’s restaurant meals and family attractions from 20 per cent to 5 per cent, at a cost of about £300m.
But the most fevered Westminster speculation centres on Healey’s so-called “rabbit” – the unexpected announcement or surprise measure a Chancellor pulls out of the hat to steal the headlines and give the Budget a defining moment.
The most closely watched is the personal tax allowance. Tax thresholds have been frozen until 2031 – meaning more people are paying more tax as wages increase – so-called stealth taxes. But from next April, the state pension will rise to about £13,036 a year, above the personal tax allowance of £12,570, thus becoming taxable for the first time.
The Treasury has pledged that people living on the state pension alone will not pay tax on it, but have not said how this will work. Raising the personal allowance for everyone to just over £13,000 would solve the problem, but cost about £4bn.
There is also speculation that Burnham could reverse Reeves’s freeze of the Plan 2 student loan repayment threshold at £29,385 for three years from April 2027, following lobbying by Lucy Powell, the Education Secretary. The Treasury committee has called for the freeze to be reversed as it hurts young people strugging with repayments. The Department for Education has warned that doing so would reverse a £5.9bn saving.
Another potentially popular move would be to ease the pressure on family farms by raising the inheritance-tax threshold, potentially taking “a whole slug of farmers” out of the tax.
Major spending decisions have been pushed back to next year, as have significant welfare reforms pending the Timms review of disability benefits and Alan Milburn’s review of youth inactivity, which is examining how to help more young people into work.
The UK has committed to spending 3 per cent of GDP on defence by 2030 and 3.5 per cent by 2035. The Office for Budget Responsibility estimates that the 2030 target requires an extra £17.3bn.
Healey had said the route to 3 per cent would be set out at the next spending review, expected in spring 2027.
Will it all pave the way for an early election?
Senior Conservatives expect a Budget made up largely of small, cheap measures and believe Healey will “follow the Treasury’s lead.”
One shadow minister said of Healey’s time at the Ministry of Defence: “He wasn’t famous for original thinking.”
He said: “The Treasury is very good because it will offer you the magician’s choice. They’ll say, we’ve got three things, you decide. So you choose one of these three cups, but you always choose the one that they’ve constructed for you to choose.”
The Conservatives expect “a whole smorgasbord” of things that cost £200m or £300m, along with spending announcements kept off the government’s balance sheet. They also expect the Chancellor to extend existing cost-of-living measures, such as capped bus fares.
The constraints facing Burnham have once again reignited the question of whether he will call a snap general election to secure his own mandate and free himself from the 2024 manifesto.
There has been rampant speculation that could come as soon as the week after the Budget, although Burnham has ruled out a snap poll.
A Labour MP said it was clear Burnham “wanted his own mandate for sure”.
Election fever has already spread beyond Westminster. Last week a Lib Dem councillor told HQ that he had tried to order some new Correx boards – the plastic placards used in election campaigns – only to be told the company could not fulfil the order for another month because it would be using all of November to complete a large order for the Labour Party.
The order may yet prove to be no more than an intriguing coincidence. But with the fiscal rules unchanged, money tight and expectations high, Burnham faces a more immediate test than securing his own mandate: convincing Labour MPs that his leadership marks a genuine change of direction.