Key Takeaways
- John Healey’s first budget as chancellor could include some significant changes to UK taxes and public spending.
- The new chancellor recently quit as defense secretary, saying the government was not spending enough.
- New prime minister Andy Burnham and his chancellor are committed to the UK’s “fiscal rules.”
UK government bond markets may have greeted John Healey as Andy Burnham’s new chancellor with relatively little drama, but ensuring they stay onside in the coming months will be a bigger challenge. Economists say battles lie ahead over taxes, spending, and government borrowing. Just last month, a clash with the Treasury (which he now runs) over military spending saw Healey resign as defense secretary.
Political commentators say Healey was selected for the role based on the breadth of his experience. At 66, he is nearly 20 years older than his predecessor, Rachel Reeves. That “elder statesman” image underlines his perceived support for the status quo in the form of the United Kingdom’s fiscal rules.
Chancellors usually work closely with prime ministers to make sure ambitious plans are affordable within budget constraints. Burnham has already pledged significant reform of UK public life through an ambitious and potentially costly 10-year plan, which Healey will have to make palatable for investors in the Autumn Budget.
“A boring budget doesn’t win elections, nor does it square with Burnham’s rhetoric about big change. So a much bolder budget clearly can’t be ruled out,” says James Smith, developed markets economist at ING.
For now, the prime minister and the chancellor are aligned on keeping to the UK’s “fiscal rules,” though Burnham said on July 20 that there could be some “flexibility” in sticking to them—a comment that pushed gilt yields higher.
Will Healey Stick to the Fiscal Rules?
These rules mean UK national debt must fall as a share of GDP by 2029/30. Day-to-day spending must also be in balance by this time so the UK “is not continually borrowing just to pay for everyday services,” the IFS says.
“Burnham has committed to maintaining the existing fiscal framework, limiting the scope for a dramatic policy shift. That may reassure gilt markets, but it leaves little room for unfunded commitments or broad fiscal stimulus,” says Anthony Willis, senior economist at Columbia Threadneedle Investments. “For investors, the key question is whether the government can improve the UK’s medium-term growth profile without undermining fiscal credibility.”
Mike Coop, Morningstar’s chief investment officer, EMEA, agrees that Healey has limited room for maneuver, not least because of the Liz Truss era of 2022, when unfunded tax pledges saw bonds sell off and the pound slump. Still, Healey may be able to think of creative ways to avoid a direct increase in government borrowing. “Chancellor John Healey’s experience of working with private capital to fund infrastructure projects during the Blair era may encourage a more balanced approach to public investment,” Coop says.
Will Healey Raise Taxes as Chancellor?
Healey’s return to central government comes as Burnham adds cost of living support to a burgeoning pile of promises made before he arrived in Downing Street. On his second day as prime minister, Burnham announced an immediate scrapping of VAT on energy bills.
Labour’s 2024 manifesto pledge not to increase the headline rates of taxation also seems set to stay, for now. Still, the idea of raising the top income tax rate from 45% to 50% has reentered the conversation, as has a “wealth tax” on the net value of assets and estates.
“Although Burnham has not yet published his tax policies, he has previously advocated that income is overtaxed and assets are undertaxed,” says Libbi Cohen, solicitor at Winckworth Sherwood. “Despite not explicitly proposing a wealth tax, Burnham’s suggested reforms would likely have a similar practical effect if implemented.”
State Pensions, CGT, and Inheritance Tax
The state pension triple lock will likewise stay, but the noise surrounding the policy is likely to increase. Burnham says Ukraine will continue to receive the same financial and political support it had under Keir Starmer. Each commitment makes the politics of balancing the books harder to navigate.
Other options are available to Burnham and his chancellor. These include aligning—and increasing—capital gains tax rates with income tax rates, as well as replacing the current inheritance tax regime with a flat 10% tax on all estates. Burnham supported this idea while he was health secretary under Gordon Brown, and he has highlighted it since.
Healey has said far less about wealth taxes. It will fall to him to manage the UK’s fiscal and monetary credibility both at home and on the world stage. The way these are interpreted matters.
Will Healey Increase Defense Spending?
Just last month, Healey blamed the department he now must lead for the political mess that resulted in his resignation as defense secretary. The government increased its defense spending commitment to nearly £300 billion by 2030, but Healey said the UK will still fall short of meeting NATO targets of spending 3.5% of GDP by 2035.
“The Treasury still often sees defense as a drain on public spending and not the driver of economic growth that we’ve demonstrated in two years that it can be,” Healey said in an interview this month, saying the department is “in denial” about military spending,
Some think this clash over spending may become a problem for bond markets. “Healey presents an immediate fiscal challenge because he quit as defense secretary after Reeves failed to commit to spending fully 3% of GDP on defense, equivalent to a shortfall of around £10 billion a year. Presumably, fixing this funding gap was a precondition of Healey accepting the job,” says Tony Whincup, head of investment specialists at TrinityBridge.
When Is Healey’s First Budget?
Healey is expected to deliver his first Autumn Budget as early as October, when investors and households will receive greater clarity on the government’s plans for taxes, spending, and borrowing.
