Chancellor John Healey is struggling to make his numbers add up with the Budget just three weeks away, and risks a fiscal reckoning that even Rachel Reeves did not cross.
Former chancellor Rachel Reeves will know how he feels. Both of her Budgets walked on a similar knife edge, and both ended in chaos and controversy, as tax, spending, borrowing and the national debt flew to new highs. Reeves bequeathed an even bigger mess than the one she inherited from the Tories, and new PM Andy Burnham is showing no sign of getting to grips with it.
Now Healey could even be forced into doing the one thing even Reeves did not do, and make everything far worse.
Fiscal rules under pressure
In a bid to boost her credibility, Reeves famously set herself two rigid fiscal rules. The first was that day-to-day public spending must be covered by revenues, she could only borrow to invest. The second was that public sector debt must start falling as a share of the economy.
That is why, when Reeves broke down in tears in Parliament, the bond market panicked and gilt yields shot up. Investors feared that if she went, her rules would vanish with her, and the next Labour chancellor would really open the spigots. Eventually, both Keir Starmer and Reeves did fall, but her fiscal rules remained, like twin pillars of a collapsed desert temple.
Healey inherited those dusty pillars, and says he will stand by them too.
Many in Labour are furious, because they would rather he told the bond market where to shove it and went on a spree. But Healey's hopes of abiding by those rules are slim because every time boss Andy Burnham opens his mouth, a new spending pledge comes out.
Spending pledges and economic strain
Even when Burnham got tough by pledging to scrap the state pension triple lock, he instantly spent the savings (and more) on his plan for a National Care Service. With Burnham at the helm, no chancellor alive could balance the books.
The Iran war is not helping, as it drives up the oil price, inflation and interest rates. That makes servicing the £3trillion national debt even more expensive. Reeves left Healey with around £24billion of fiscal headroom. Some estimates now put it as low as £7billion.
US investment banks Goldman Sachs and JPMorgan have warned it could be wiped out altogether. Even Reeves did not drive the UK economy over that particular cliff. If Healey does it could have disastrous consequences for taxpayers, and the UK economy.
Options on the table
Healey may need to raise anything up to £12billion or £20billion in his Budget. One way of doing this is to cut spending. But that would destroy Andy Burnham’s honeymoon in a heartbeat. Labour will not stand for it. Remember what happened when Starmer tried to shave a modest £5billion off welfare?
The other option is to hike taxes, something Labour governments are much better at doing. But this will not be that easy, because Healey cannot hike the big ones like income tax, national insurance or VAT due to Labour’s manifesto pledges, and businesses cannot take much more strain.
He has another option. Do nothing. Avoid making any big decisions in the Budget and hope something turns up. The risk is that this makes him look weak, and the bond market panics.
Healey has one final option. Fiddle those fiscal rules. Plenty on the left are urging him to do that. Those rules are political targets, not laws of nature. Healey could tweak definitions, extend timelines or some other sleight of hand. There are two problems with this. First, it would make him look worse than Reeves, and no politician wants that. Second, it might panic bond investors and trigger a Liz Truss-style post-Budget meltdown, and Healey will not fancy that either.
Reeves has just been voted the worst of the past five chancellors, according to an AJ Bell survey. If Healey breaks her fiscal rules, he will win that unwanted title instead. So what will he do? We will find out on October 28.
