Chancellor John Healey is about to run out of headroom at the worst time (Image: Getty)
Under both Labour and the Tories, our national debt has been climbing for decades and is heading for £4trillion. So has the amount of interest we pay. For each £10 the government now spends, £1 goes on debt interest. That doesn’t reduce the amount of money we owe, it’s purely servicing the loan. Labour’s spending spree has only added to that debt, while piling an even bigger burden on taxpayers. We’re on the brink, now that you’d know from listening to Andy Burnham. He just wants to spend more. Fat chance now.
I’ve been banging on about gilt yields for years, but in particular over the last few weeks, as they’ve been inexorably climbing. They’re a barometer of how dangerous our financial position is, and right now it’s at boiling point. Gilt yields measure how much we pay bond investors to persuade them to lend us money. They demand a steady rate of interest and their cash back after a set term. If they fear their money isn’t safe, they’ll demand more interest. And today, they are fearful.
Britain has the highest government bond yields in the entire G7, partly because investors don’t trust our politicians to keep the lid on spending, and partly because of weird decisions by the Bank of England. Today, gilts yields climbed even higher, with 30-year yields hitting 6% for the first time since January 1998. At one point, they touched 6.07%, before retreating slightly. This may only be a temporary reprieve.
Under Tory PM “Calamity” Liz Truss 30-year gilt yields peaked at just over 5%, and that was enough to drive her out of office. Now they’re a full percentage point higher. Less than a month before Chancellor John Healey delivers his maiden Budget on October 28.
As we saw in his conference speech this week, he’d rather treat Labour members to sentimental blether about the old miner’s lamp on his desk than tell them some hard truths. Healey inherited £24billion of fiscal headroom from predecessor Rachel Reeves, which was pretty tight. Before today, it had shrunk to £9billion. On an annual budget of £1.5trillion, that’s wafer thin. Now it’s even lower.
Today’s spike is mostly down to the war in Iran, which is driving up inflation and interest rates everywhere, notably in the US. But the UK is particularly exposed, given our yields were already relatively high.
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It’s a disaster for mortgage borrowers. It’s a disaster for the UK economy, as high interest rates will make everybody feel poorer and squeeze company spending and investment. It’s also a blow for the stock market, with the FTSE 100 plunging 1.8% today, along with markets around the world. That threatens the value of our pensions and Stocks and Shares ISAs.
Today’s spike will make it even harder for Healey to balance the books, which means he’ll either have to cut spending (I’m joking, he won’t) or more likely hike taxes. That will snatch still more money from taxpayers and drive more wealth makers away.
Now gilts have broken the 6% benchmark, they could climb to 7% or 8% unless the Iran war ends sharpish. Each percentage point increase adds around £10billion to our annual borrowing costs over time. It could trigger a sterling crisis, while rocketing French borrowing costs threaten the euro too. Donald Trump‘s US is also in a mess. But we are on the front line. As reality bites, Andy Burnham has nowhere to hide. Fine words won’t save him. Only tough action. Oh dear.
John Healey just hit a brick wall – Andy Burnham’s honeymoon ends right here
Andy Burnham’s first months in Downing Street were always going to be judged against a simple question: could the optimism surrounding his arrival survive contact with the realities of government?
For much of the summer, the new Labour prime minister appeared to have some political breathing space. But as autumn begins, the pressure is shifting towards the Treasury, and Chancellor John Healey is increasingly at the centre of the challenge.
Healey’s first Budget on October 28 is now emerging as a defining moment for the new government. Reuters described him as facing a difficult balance between Burnham’s ambitions and the need to maintain fiscal discipline, while rising borrowing costs have reduced the government’s room for manoeuvre.
That is the “brick wall” confronting the government.
It is not evidence that Burnham’s administration has already failed. Nor does it prove that Healey cannot deliver its programme. Instead, it represents the point at which political promises have to be translated into detailed decisions about taxation, spending, borrowing and economic priorities.
From honeymoon to hard choices
When Burnham entered Downing Street in July, his government inherited a difficult economic environment but also benefited from the political advantage that often comes with a new administration.
Reuters reported in August that Burnham had enjoyed a summer in which several measures were presented as giving households “some breathing space”. But the same report warned that parliament’s return would bring a much harder question: how to finance the government’s ambitions.
Those ambitions are extensive.
Burnham has talked about reforming social care, accelerating housebuilding, rebuilding industry and changing the relationship between government and the regions. His government has also committed itself to a substantial industrial strategy and further public investment.
The difficulty is that these objectives compete for scarce resources.
The government cannot simply announce a programme of spending without explaining how it will be financed. At the same time, increasing taxes carries political costs, while additional borrowing can increase pressure on government finances and potentially raise the cost of servicing debt.
That is why Healey’s position matters so much.
Healey’s first major test
The Chancellor’s conference speech offered a strong political message about rebuilding Britain’s industrial base.
Healey described his programme as a “new age of industrialisation” and focused heavily on manufacturing, apprenticeships, infrastructure and economic renewal. He also announced plans involving new floating docks for the Royal Navy’s submarine service, with the project intended to support Britain’s nuclear-submarine fleet.
The political ambition was clear.
The unanswered question was how much it would cost.
The Guardian’s analysis of Healey’s conference speech noted that he offered an upbeat vision but provided limited detail on how Burnham’s wider programme would be financed.
That criticism goes to the heart of the problem.
A government can simultaneously want higher investment, stronger public services, more housebuilding, industrial renewal and fiscal stability. But it must still decide the order in which those objectives are pursued and identify the money available for them.
The Budget is where those choices become concrete.
Borrowing costs make the calculation harder
The economic environment has also become less forgiving.
Recent reporting has highlighted higher UK government borrowing costs and international financial turbulence. The Guardian reported on October 1 that senior Labour figures were concerned about the Chancellor’s approach as long-term gilt yields reached around 6%, putting additional pressure on the government’s fiscal calculations.
Higher borrowing costs matter because governments do not simply borrow once.
Existing debt has to be refinanced over time. If the interest rate on new borrowing rises, the cost of servicing public debt can increase, reducing money available for other priorities.
Healey has therefore repeatedly emphasised fiscal discipline.
The Financial Times reported that he intended to remain within the government’s fiscal rules when delivering his first Budget.
That creates an obvious tension with the scale of the political agenda.
Burnham wants visible change. Healey has to make sure the Treasury can afford it.
The tax question
One of the most sensitive issues is taxation.
Healey has left open the possibility of changes to capital gains tax and has also indicated that decisions on fuel duty will take household pressures into account. The Independent reported that the Chancellor had acknowledged the difficult circumstances facing the government while considering potential tax and spending decisions for the October Budget.
Speculation about tax rises has already created uncertainty for households and businesses.
But it is important to distinguish speculation from confirmed policy.
The Chancellor has not published the complete Budget package. As Healey himself has indicated, many decisions will not be formally announced until October 28.
That means headlines about specific taxes should not automatically be treated as government policy.
Nevertheless, the underlying problem is real. If the government wants to fund substantial investment while maintaining fiscal credibility, it must decide where additional revenue will come from or which existing spending commitments can be restrained.
There is no way around that arithmetic.
Welfare creates another political fault line
Healey has also made welfare reform a major part of his political message.
In his Labour conference speech, he argued that the social-security system must support people who cannot work while also helping others move towards employment. He focused particularly on young people who are not in employment, education or training.
The Chancellor has framed this as both an economic and social issue.
But welfare reform is politically sensitive inside Labour.
The Independent reported that Healey expected to make the case to Labour MPs for reforms designed to contain the growth of welfare spending.
That means the Chancellor is facing pressure from two directions.
Some Labour MPs want stronger protection for people dependent on benefits. Others accept the argument that rising expenditure needs to be controlled and that employment should be made more attractive.
The government’s challenge is to reconcile those positions without allowing the welfare debate to dominate the entire Budget.
Burnham’s political promise meets Treasury reality
The relationship between Burnham and Healey is therefore becoming particularly important.
Reporting in September suggested that some people close to Burnham were concerned that Healey could become too constrained by Treasury thinking. The Guardian described a tension between the Prime Minister’s ambitious political vision and the Chancellor’s responsibility for financial discipline.
That tension is not necessarily evidence of a Cabinet split.
Indeed, Burnham and Healey have repeatedly presented themselves as working towards the same broad objective: economic renewal combined with improved living standards.
But different jobs require different priorities.
The Prime Minister has to communicate what his government wants to achieve. The Chancellor has to calculate what can actually be paid for.
Those responsibilities inevitably collide when resources are limited.
Social care adds another major commitment
Social care could become one of the clearest examples.
Burnham has made reforming the system a personal priority and has said he intends to tackle the issue during his premiership. The Independent reported that he acknowledged the political difficulty involved but said he was prepared to take difficult decisions on social care.
The problem is familiar: improving social care can require substantial long-term funding, while failing to address the system can create costs elsewhere, including pressure on the NHS and families.
Burnham therefore faces a choice between the immediate fiscal cost of reform and the longer-term consequences of leaving the system largely unchanged.
Again, Healey will have to work out the numbers.
The end of the honeymoon?
It would be premature to declare the end of Burnham’s government based on one difficult Budget.
New administrations routinely encounter a transition from political optimism to practical constraints. The first months of a government can be dominated by announcements and direction-setting; later months are dominated by implementation.
The important change is that Burnham’s government is now reaching that second stage.
The Guardian reported in late August that the Prime Minister’s initial period of relative political freedom was giving way to difficult decisions over the Budget, welfare, migration and prisons.
The October Budget therefore matters not because it automatically determines the future of the government, but because it will provide a much clearer picture of its governing model.
Will Labour prioritise investment?
Will it raise additional revenue?
Will it restrain spending elsewhere?
Will it maintain strict fiscal rules even if that limits the speed of reform?
And can Healey provide enough detail to convince financial markets, businesses, Labour MPs and voters that the government’s ambitions are financially credible?
Those questions cannot be answered by political rhetoric alone.
The real test begins now
The phrase “brick wall” captures the moment when ambition meets constraint.
Burnham’s government has promised a significant change in direction. Healey has now been tasked with turning that political programme into a financial plan.
The Chancellor’s conference performance demonstrated that he wants to present Labour as the party of industrial renewal rather than simply the manager of existing decline. But the criticism that he has not yet explained fully how that transformation will be paid for remains an important issue.
The answer will come in the Budget.
If Healey can reconcile investment with fiscal discipline, the government will have a clearer foundation for its wider programme. If the arithmetic forces substantial compromises, Burnham will have to decide which promises matter most.
Either way, the period when the new government could rely primarily on the political excitement of being new is passing.
The next stage is about delivery.
And for Andy Burnham, that may prove considerably more difficult than making promises in opposition.