Key facts
- UK Chancellor John Healey warned of a tough budget on October 28.
- He cited the Middle East conflict as a major influence on economic conditions.
- Healey aims to maintain fiscal headroom while adhering to Labour's tax pledges.
- Soaring global bond yields are pressuring public finances and increasing borrowing costs.
- Healey is committed to cutting welfare spending and increasing employment.
UK Chancellor John Healey has signaled that the upcoming budget on October 28 will be challenging, largely due to the ongoing conflict in the Middle East. In an interview with the Financial Times, Healey stated that the war would significantly influence his first budget, emphasizing the need for a robust 'buffer against uncertainty' in an increasingly unstable global environment.
Economists anticipate that Healey may need to implement tax increases or substantial cost-cutting measures to preserve the £24 billion fiscal headroom left by his predecessor, Rachel Reeves. Healey acknowledged the direct impact of the Middle East situation on inflation, economic growth, and borrowing costs, framing it as part of a broader trend of a more dangerous and uncertain world.
Despite the economic pressures, Healey affirmed his commitment, alongside Prime Minister Andy Burnham, to meeting the government's fiscal rules. He indicated plans to uphold Labour's manifesto pledges, which include not raising income tax, national insurance contributions, VAT, or corporation tax. The government's financial planning is further complicated by soaring global bond yields, which have reached an 18-year high, increasing the cost of government borrowing.
Healey also addressed criticism regarding defence spending, having previously resigned as defence secretary over the failure to secure a commitment to raise spending to 3% of GDP by 2030. He acknowledged the cost of living pressures on households and businesses, stating a commitment to cutting the welfare bill and encouraging more people into work, with some decisions yielding benefits in the long term.
Economist Jim O’Neill suggested that the government could reassure bond markets by taking credible actions to control welfare spending and reconsider the pensions triple lock, which has significantly increased the state pension bill. Jonathan Cribb of the Institute for Fiscal Studies proposed an Australian-style system for state pension increases, balancing cost with safeguarding against wage declines. Reform UK has outlined plans for substantial public spending cuts, including reductions in welfare, net zero investments, and overseas aid.