Chancellor John Healey is skating on thin ice. That’s not me saying it, but PM Andy Burnham’s own economic adviser.
John Healey cannot afford to make the one mistake Rachel Reeves avoided (Image: Getty)
Andy Haldane was chief economist at the Bank of England, so knows what he’s talking about. He’s just said that Healey must balance the books in his upcoming Budget or risk plunging Britain into a financial crisis. He also says the chancellor cannot do it by hiking taxes, which would be “disastrous” and risk “cratering growth”. Instead, Healey must do the unthinkable. At least, it’s unthinkable for a Labour chancellor working under this Labour PM. Haldane says Healey must “take the knife” to ballooning public spending.
Haldane no longer advises Burnham formally. Given that he recently accused Burnham of running up a “traditional tax-and-spend socialist government”, that’s hardly surprising. He isn’t the only one of Burnham’s advisers sounding the alarm. Former Goldman Sachs economist Lord Jim O’Neill has said another Budget tax raid would be “stupid”, damaging the growth Britain desperately needs. Now an even bigger cheese has waded in.
Bank of England governors normally steer clear of politics, but these are not normal times. Speaking to fellow central bankers yesterday, BoE governor Andrew Bailey warned that any government tax and spending plans must “be seen by markets as credible”. Bailey even invoked Liz Truss’s notorious 2022 mini-Budget, which sent borrowing costs soaring, and warned: “If markets begin to doubt the fiscal trajectory, bond yields can rise further.”
John Healey says UK economy is showing ‘huge resilience’
That’s as far as Bailey dare go. Tory shadow chancellor Andrew Griffith said the message was clear: “In central banker speak this is a clear warning to the government to get a grip on their debt-fuelled spending binge.”
It was a timely reminder, as yesterday 30-year UK gilt yields topped 6% to hit a new 28-year high. We can’t afford them to go any higher, but they almost certainly will. Especially if Healey goes on a spree.
Rachel Reeves was a disastrous chancellor. Her £66billion tax raids crushed business confidence, while her spending plans left Britain in hock to the tune of £130billion a year. But she got one thing right. She set out her fiscal rules and stuck to them.
Healey says he will do the same, but many on the left are demanding he abandon those rules, for the obvious reason that they stop him from chucking still more taxpayer cash at Labour’s pet projects.
When Healey told Labour’s conference that money was tight, party members fell silent. It was a message they didn’t want to hear. It’s one Burnham doesn’t want to hear either.
The PM has already cut VAT on electricity bills, capped bus fares and signalled help for rough sleepers. He also wants to fund a big council house-building programme and sort out social care. All worthy aims, that cost money we don’t have.
A global financial crisis could turn nasty. Look at indebted France. They’re already rioting, even before it’s really got going. If the Iran war drags on and the oil price climbs, then inflation, gilt yields and Britain’s borrowing costs will rise still higher, destroying Healey’s wafer thin fiscal headroom. We could end up in the same mess as the French.
Reeves presided over two disastrous budgets, and Andrew Bailey couldn’t resist having a pop at her too. But she didn’t trigger a fiscal crisis, surge in gilt yields or run on the pound. If Healey falls through that thin ice, we could get all three.
But Healey isn’t just watching the bond market. He’s got one eye on a Labour Party that wants more tax, borrowing and spending, and a PM who keeps promising them just that. If Healey caves where Rachel Reeves didn’t, we’ll be screaming for her to come back. Well, almost.