Key facts
- Chancellor John Healey is reportedly facing fiscal constraints due to rising borrowing costs and depleted fiscal headroom.
- Prime Minister Andy Burnham's ambitious policy vision, including public control of utilities and social housing, clashes with Healey's cautious approach.
- Economists estimate that about half of the £24bn fiscal breathing space built up by the previous chancellor has been eroded.
- A new report suggests that replicating Manchester's model of devolution could unlock significant economic growth across England.
- Healey has stressed fiscal responsibility as the "bedrock" of his approach and intends to stick to previous fiscal rules.
Prime Minister Andy Burnham, in office for just over six weeks, is facing growing unease about the economic realities confronting his administration, despite initial political calm and high approval ratings. The backdrop for Chancellor John Healey's first budget is particularly challenging, with a global bond sell-off driven by oil price anxiety and increased defense spending pressure pushing government borrowing costs to their highest since the 2008 financial crash.
Economists estimate that approximately half of the £24 billion fiscal breathing space accumulated by former Chancellor Rachel Reeves has been eroded by higher inflation and interest rates. This severely limits Healey's room for maneuver, especially given the government's commitment to avoid the severe welfare cuts that followed previous fiscal tightening. Healey, who recently attended the G20 finance ministers' meeting, is acutely aware of external factors impacting economic forecasts, such as rising oil prices due to renewed conflict in Iran.
Despite Healey's repeated emphasis on fiscal responsibility and adherence to Reeves's fiscal rules, his cautious tone contrasts sharply with Prime Minister Burnham's ambitious and potentially costly policy vision. This includes plans for greater public control of utilities, reform of the social care system, and a large-scale social housing program. One Treasury source described Healey as being "in a bind," caught between his instinct for stability and Burnham's desire for significant change.
Downing Street has been keen to highlight Burnham's agenda, with the Prime Minister promising "much more substantial change." However, friction between the Treasury and Downing Street has surfaced, with Healey suggesting in a television interview that the government was pursuing a "continuity" policy, a remark strongly pushed back against by No 10 insiders. Allies of Burnham have expressed concerns that Healey might be overly influenced by the Treasury's orthodox views.
A report released this weekend by Mandala Partners, led by former Downing Street economic adviser Nick Williams, suggests that replicating Manchester's economic success through devolution in housing, transport, and health could unlock up to £80 billion in growth across England. The report highlights that an £8.5 billion housing investment program could generate nearly 100,000 homes, attract over £20 billion in private investment, and support more than 70,000 jobs.
While not officially commissioned by No 10, the Mandala study bolsters Burnham's argument for devolution as a key to economic growth. Healey has privately acknowledged that modest additional borrowing for investment may be possible, referencing a 2024 rule change allowing financial assets to offset government debt. However, there is little indication of a radical shift in perspective from the Treasury. Healey is expected to deliver a speech emphasizing devolution and public investment, but also the need to instill confidence in the private sector, potentially casting doubt on calls for a windfall tax on banks.
Concerns are mounting among Labour MPs about the pace of change and the reconciliation of Burnham's promises for "breathing space" on the cost of living with fiscal responsibility. Tan Dhesi, chair of the Commons defence committee, echoed this sentiment, stating that "vibes alone just will not be enough." Despite these anxieties, Downing Street sources maintain that improving infrastructure and devolving power are essential for economic growth, citing examples like the year-long wait for grid connections reported by businesses in Cornwall.
Advisers suggest Healey's economic instincts may lean towards caution, potentially making him even more prudent than his predecessor. Nevertheless, government aides insist that Healey is fully aligned with Burnham's agenda, acknowledging that while tensions between different government parts are inevitable, the Chancellor ultimately supports the Prime Minister's vision.