By Dan Corry, Chief Economist at The Future Governance Forum (FGF). Originally published in Public Finance.
That was pretty clever stuff from John Healey in his debut Budget as Chancellor. Facing a very tricky situation, navigating high expectations following the Prime Minister’s emphasis on ‘hope again’ on the one hand and nervous bond markets on the other, he managed to more or less keep everyone happy. Not ecstatic — and from all sides there are, and will continue to be moans. But in truth there was never going to be big spending cuts as some on the right were demanding, nor enormous tax rises on the rich as some on the left were dreaming of. And it was never going to be the time for total clarity on spending profiles in advance of the 2027 Spending Review, whatever purist economists might want.
Healey was in general neither helped nor particularly hindered by the new forecast from the Office for Budget Responsibility (OBR) — the first under its new boss, economist Jonathan Haskel. It landed not a million miles from what was expected. The government will meet its fiscal rules, even if some doubt the tight spending totals currently penciled in for the next few years will actually hold, especially in the light of significantly higher inflation since those totals were first set. Yet it still faces high debt and high interest rate costs. Growth remains subdued, even if better than that of many other comparable countries, and not bad given the shocks that have and continue to rain down on us courtesy of the man in the White House (and literally, in the case of the weather). Underlying productivity — the thing that matters most in the long run — remains uncertain. As the OBR says: “If productivity growth were 0.5 percentage points higher or lower than forecast, borrowing could reach £50 billion lower or £40 billion higher”. Inflation is ticking up, mainly due to high energy costs caused by the Iran war, and will do so for some months — but the OBR expects it to fall later in 2027.
One may wish all of this was not there, that you could jack up borrowing without consequences, or raise or cut taxes depending on your political preferences, and all would be fine. But back in the real world, the question was what could Healey do to help on various agendas given his limited room for manoeuvre.
Breathing space for today?
And he did try to help. Or as the first half of the Budget slogan would have it, provide “breathing space for today”. Vital for many people was action to reduce, or at least help with, the cost of living. Here useful steps were taken to help with energy costs, motoring costs and some limited tariffs. Useful changes to the Carers Allowance were also announced, ending carers having to face disastrous financial cliff edges but also hopefully leading to sensible reform of both welfare and social care on the back of the Timms, Milburn and Casey reviews reporting in the coming months. These attacks on the cost of living are well worth having, even if factors outside government control — like wars, tariffs, droughts and floods — are the real drivers behind rising costs at the moment.
More crucially for the longer term — the “fresh hope for the future” which provided the second half of the Budget slogan — was what could Healey do to underpin growth and tackle some of the bigger structural problems besetting the British economy, especially around regional inequality. The answer was actually quite a lot — much of it in line with things we at FGF have been urging.
So there was lots of extra ‘zap’ on devolution, empowering mayors to get their own areas going through greater financial and economic power, which we called for at the start of the year. More cash, more responsibility for decision making, and a greater ability to borrow all make sense as part of the government’s broader ambition to ‘rewire the state’. The path to fiscal devolution has also become much clearer, and is pretty radical as it tries to undo our historically over-centralised system. Although the devil will be in the detail, especially on issues like ensuring a degree of inter-regional equality without destroying incentives for an area to grow.
Then there were welcome initiatives in the wealth-creating bits of our economy, from AI and energy to our high street pubs and shops. Entrepreneurs and innovation were also backed with things like a new Capital Gains Tax Founders’ Relief, more funding to the British Business Bank so it can back high-growth businesses and the piloting of a Young Entrepreneurs Allowance which FGF recommended recently. And Healey also added to the firepower of the UK’s public financial institutions (mainly the National Wealth Fund and the British Business Bank). This is a sensible move, not least as those institutions no longer turn up as constraints in the fiscal rules (thanks to Rachel Reeves).
Reading between the lines
As ever, some of what matters most is what does not happen in a Budget. So it should be noted that the Chancellor did not announce any major new taxes on business — outside the oil industry and the banks — and actually opted for some cuts for smaller firms. This will be welcome to the private sector after recent years in which this has not been the case, as the last Labour administration wrestled with its difficult fiscal inheritance. Stability is vital if we want to get firms investing.
Exactly what the Burnham/Healey vision of a path to growth is remains pretty enigmatic. And the big issues not addressed in this Budget will need to be tackled soon: welfare reform of some kind, a challenging spending review, the detail of how we hit defence spending targets, and where we are on the road to net zero.
One city commentator said pre-Budget: “The first test is whether Healey avoids growth-negative or inflation positive tax rises, inflationary giveaways and, more broadly, a material fiscal loosening at the wrong point in the cycle”. Healey has passed that test and has done a lot of useful things besides.
So not a revolutionary Budget, but a pretty decent one for what was feared would be just a ‘steady as she goes’ fiscal event. And thankfully Healey avoided scoring financial own goals like the disastrous Liz Truss/Kwasi Kwarteng ‘mini-budget’ four years ago.
