Bond market volatility means John Healey will have to take tough decisions, soon, if he wants to meet spending pledges
In John Healey’s bright Treasury office, overlooking St James’s Park, the artwork has not changed since his predecessor, Rachel Reeves, selected a row of Bridget Riley prints in her feminist rehang. Judging by the signals emerging from No 11 about the chancellor’s 28 October budget, not much else has changed either.
Voters listening to Andy Burnham’s promises to overthrow 40 years of neoliberalism and vanquish the ghost of Margaret Thatcher would be excused for expecting a radical policy reset. Early signs suggest they may be disappointed.
Healey will give a speech about growth policy on Monday in his bluff, reassuring style, less than six months on from Reeves’s Mais lecture. He is expected to lean heavily on two of her favourite themes: investment and devolution.
That’s hardly surprising. The UK economy has been held back by decades of underinvestment, and growth has been far too concentrated in London and the south-east.
But the speech seems likely to be followed up six weeks or so later with a “steady as she (or rather he) goes” budget – with key decisions, including when the UK will be spending 3% of GDP on defence, deferred.
When he resigned in June, Healey was adamant that the UK should set a “headmark date” of 2030 for hitting the 3% target. Treasury sources indicate that he has not changed his mind, yet he has made clear he intends to defer setting out a timeline until next year’s spending review.
That suggests Reeves’s promise of one major fiscal event a year – the autumn budget – with a low-key forecast in the spring has been ditched.
Usually, the budget before a spending review would set out the “envelope” – the broad path of future public spending – and, where necessary, the tax rises to finance it, leaving the details to be hammered out later. But the priorities for 28 October appear to be more immediate. Healey will fill in the gaps in the defence investment plan – the one he resigned over three months ago.
There may be also modest further moves towards giving consumers “breathing space” from higher energy bills in January – though judging by the mood music, it will not be funded, as the Trades Union Congress has urged, by a windfall tax on banks.
Healey told the Financial Times this weekend: “People look at the banks largely as big profit-making multinationals, but their fundamental role is too often overlooked. That’s something that’s strong in my mind.”
There is some logic for projecting what the chancellor has called “steadiness”. He has just returned from the G20 finance ministers’ meeting in Asheville, North Carolina, where volatility in government bond markets was a hot topic.
Higher interest rates on the Treasury’s debt pile already appear to have wiped out up to half of the £24bn headroom Reeves left against her fiscal rules.
Up to another £4bn is expected to have evaporated as a result of lower-than-forecast migration, and Burnham’s VAT cut on electricity bills will have to be paid for, too.
It must be tempting to paper over the cracks and hope for the best. But the truth is that it will be all but impossible to raise defence spending to 3% by 2030 and avert the Whitehall funding squeeze pencilled in by Reeves for the back end of the parliament without raising taxes.
