Healey's Budget needs to sustain the stronger economy through gathering clouds

There have been almost no Budget leaks.

The chancellor's aides are using intelligence-style security measures to guard its secrets: the Budget has been split into "compartments" with very few given access to all of them. There are codenames. The IT has been locked down and ministers viewing the plans have to sign a digital promise not to brief media.

As a recent former defence secretary, Chancellor John Healey has embraced such strict procedures, and has approached most of his public engagements and interviews with a sturdy refusal to break the Budget omertà, akin to his fellow Yorkshireman Geoffrey Boycott's at times ultra-defensive stance on a cricket pitch.

The economic news has been good - growth has been better than expected and the International Monetary Fund has endorsed the UK for "standing out" among the G7 countries for at least planning to cut borrowing.

The bond market's reverse beauty contest, in which investors single out the countries they distrust most, has moved on from Britain. Traders I occasionally hear from who were once focused on UK borrowing costs are now more preoccupied with "le spread" - the widening gap between French and German borrowing costs (the former being higher than the latter) - and with America's long-term debt outlook.

And yet there are clouds on the horizon. The inflation rate rose more than forecast to 3.5% in September, and borrowing numbers were also higher than forecast. This means an imminent Bank of England rate rise is very much on the cards, with the resultant rise in mortgage repayments for some.

Credibility with investors requires not just that Budget maths add up on Wednesday, but also belief that growth plans are realistic, and the perception that Downing Street can actually convince MPs to pass its Budget.

The question for John Healey is whether he can deliver a Budget that can sustain the revival in growth and offer the help with the cost of living that his backbenchers demand. At the same time he needs to reassure the markets that his budget will keep a check on borrowing.

The curious case of the UK economy

"Is it resilient, or is it actually strong?" has been the tone of the debate among economists about the curious case of the UK economy ahead of what is a vital Budget.

The UK is the fastest growing G7 country so far this year, at 0.6% in Q1 and 0.5% in Q2. The widespread assumption of stagnation in the second half is being defied with Q3 heading for 0.6 to 0.8%.

Each quarter has seen growth twice as fast as predicted by the Office for Budget Responsibility (OBR) in March and independent forecasters. This is the fastest growth in the first eight months of a year since 2017, ignoring the post-lockdown re-opening.

It's more resilient than it was in 2022. Back then, the Ukraine war, massive energy bailouts, and Liz Truss' mini budget all culminated in the UK facing the highest borrowing costs in the G7, in what was derided in financial markets as a "moron premium".

This year the gap has narrowed, as uncertainty about the US and France takes centre stage, but all advanced economies are feeling the heat from the Iran war energy shock.

Inflation has risen, but not just in Britain. The link between gas and electricity prices has weakened, meaning spikes in gas prices have less impact on electricity bills than they used to and helping to keep inflation lower than it otherwise might have been.

The fact that up until now the Iran war has been more of an oil shock than a gas shock (where the UK is more exposed) has been another saving grace. Meanwhile, the significant amount of AI and tech investment in the UK is another boost to the economic numbers.

The net result is that doom-mongering predictions of recession, of being hit worst by the Iran war, and, in some quarters, of imminent national bankruptcy, have been defied.

That economic defiance of the early part of 2026 has persisted in the first three months of the Burnham-Healey tenure in Downing Street, buoyed by a lull in the Iran war and the energy price shock.

Burnham was advised upon entry to Downing Street that if consumers could at least feel more confident, they might save less and spend more and therefore help boost growth.

So far Burnham and Healey appear to be relying on a series of relatively inexpensive "feel-better" policies - such as capped bus fares and a temporary VAT cut on household energy bills - that have improved confidence without significantly increasing spending.

But there isn't a lot of spare money, which limits just how much can be offered for "temporary and targeted" measures. And come January, the clouds on the horizon could be overhead, with typical energy bills predicted to rise by 16%, interest rates potentially up and an enduring fear that the AI bubble could burst.

Healey's essential judgement

At a gleaming hi-tech robotics research facility in Coventry last month, John Healey sought to set out the broad contours of his approach to the economy. On a walkabout at the Manufacturing Technology Centre, I asked him if there had been too much doom-mongery.

"The challenge now is to make sure that we balance the books, we manage and control public spending, and the prime minister and I are in lockstep in our determination to meet the fiscal rules with a buffer," he said.

The giant orange robot arms whizzing around were being trained by AI to use lasers to carve the most intricate metal shapes for prototype parts for the jet engines of the future. The Budget manoeuvres required by Healey may require even more precision.

The essential question is whether he has chosen to impress the markets and explain himself to his MPs, or impress his MPs and explain himself to the markets. Judging by my three interviews with him in recent weeks, it is more the former than the latter.

The answer may not be found in his speech at all, but in the borrowing tables that will reveal how much money the government expects to borrow over the coming years, published in the OBR's forecast released - assuming no repeat of last year's disaster - when Healey sits down in the House of Commons around 13.00.

Just after that, as Conservative leader Kemi Badenoch is delivering the Opposition's response, the real reaction the chancellor's team will be looking for is whether the markets move, particularly when the Debt Management Office publishes the "gilt remit" - the detail of any changes to its plan to sell UK government bonds to investors.

My sense is that every effort is being made to minimise this number, and help guide down medium and long-term borrowing rates for the government and for mortgages. (It was at this moment in 2022 that markets vomited at the prospect of how much extra they thought the government would need to borrow after Liz Truss' mini budget.)

From Healey's first day in office, the prudence message was practically tattooed to his head. He has spent more time working in the Treasury than any recent chancellor. He spent five years from 2002 to 2007 as a junior minister when Gordon Brown was chancellor - five finance bills, five Budgets, pre-Budget reports and two Spending Reviews.

For his Labour Party conference speech, Healey sported Brown's old conference tie. But the Treasury he returned to this year is a changed place in important ways. When his predecessor wore the tie, the Treasury was running an annual surplus, not a £120bn deficit adding to a £3 trillion total national debt.

I asked him just afterwards, and just before he was whisked off to a meeting of the government's emergency COBR committee on RAF Fairford, if he was going to have another go at some of the things that proved so difficult for his predecessor, former Chancellor Rachel Reeves.

He replied: "100%. I was very clear to the conference today and the public beyond. There isn't the money that there was in the 1990s. People understand that. The public aren't daft.

"Running through the Budget I deliver must be fiscal discipline and the maintenance of control on the public finances, because otherwise we won't get on top of the debt costs."

One intriguing element of what we may see on Wednesday is that this theoretically more left-leaning Labour government appears to believe they have the political capital to save money on welfare payments.

Some reporting suggests some affected younger people may see benefits payments cut, with the government instead investing more in getting them into jobs and keeping them in them through the offer, for example, of in-work therapy.

A constrained Chancellor

Back in Healey's time under Gordon Brown, there was no OBR. Back then it was not unknown for late budget maths problems to be settled with an optimistic tweak of a forecast, a date change to the economic cycle, or choosing a stronger rate of long term growth.

The OBR's verdict is crucial now - to what extent it agrees with projected welfare savings or even the importance it places on stronger GDP figures matters now.

The bigger point here is that the chancellor must be shocked by the contrast between the sheer power of the Brown Treasury to do what it wanted, and the reality of what he currently faces: the constraints of the OBR, manifesto red lines, bond markets, significant debts and an energy shock.

There are reasons to postpone some of the toughest decisions beyond this Budget, such as how to fund desired increases in spending on defence and social care. The economic outlook could improve were the Iran war to settle at some point in the next few months, and after revised statistics the OBR may also have cause to rethink last year's downgrade to long term economic growth.

There is an imaginable pathway to a forecast next year with higher growth, lower inflation and lower debt interest costs, plausibly improving the public finance projections by tens of billions.

This would be a much more agreeable basis upon which to decide the pace of those big ticket spending rises. It also may be a tempting option for anyone thinking about an election. Former Treasury officials lament: "There is always a reason for procrastination."

Expect the Chancellor to laud the resilience and strength of the UK economy and seek to sustain it, and spread growth geographically. His key judgement, however, will be a balance between extra financial and economic support and the peril of still elevated borrowing costs.

Top image credit: Reuters/Getty Images

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