UK chancellor John Healey tells Financial Times October 28 budget will be tough

Chancellor says he and PM Burnham are ‘in lockstep’ on fiscal rules

Chancellor of the Exchequer John Healey told the Financial Times that he expects his first budget on October 28 to be tough, framing the fiscal challenge as a response to what he described as a “more dangerous world.” Healey said what is happening in the Middle East is hitting inflation, growth and borrowing costs, and he told the newspaper he wants to build a “buffer against uncertainty” in the public finances.

The warning comes as economists predict Healey will need to raise taxes or implement significant cost-cutting to protect the £24 billion fiscal headroom that his predecessor Rachel Reeves established in her March budget statement. Healey faces the challenge of maintaining Labour’s 2024 manifesto commitments on taxes while addressing pressures on welfare spending, pensions, and the defense budget.

Healey told the newspaper that he and Prime Minister Andy Burnham are “in lockstep in our determination to meet the fiscal rules,” though he declined to specify how much fiscal headroom he aimed to maintain. The Financial Times reported that Healey plans to stick to Labour’s 2024 manifesto pledges not to raise taxes on “working people” — meaning income tax, national insurance contributions, or VAT — and that he is not expected to raise the rate of corporation tax.

The public finances are under pressure from soaring global bond yields, which hit an 18-year high earlier in the week. Bond yields have a significant impact on government spending plans because higher yields drive up borrowing costs. In a separate Times Radio interview, Jim O’Neill, the cross-bench peer and economist who advised Burnham before he entered Downing Street, said the prime minister could reassure the bond markets by taking “credible actions” to rein in the “excesses” of welfare spending and the state pension triple lock. “If you have the markets carrying on doing what they’re doing globally … eventually they’re going to have absolutely no choice [but to cut spending] because the penalty of the debt servicing cost and the knock-on effect to other markets including mortgage rates will be too severe for a government to resist,” O’Neill said.

The triple lock, introduced in 2010, raises the state pension annually in line with inflation, average wage growth, or 2.5 percent — whichever is highest — and has added about £16 billion to the state pension bill. On Saturday morning, Jonathan Cribb, deputy director of the Institute for Fiscal Studies, told BBC Radio 4’s Today programme that the government could consider an Australian-style system. He suggested the state pension could rise in line with workers’ earnings, with an inbuilt “temporary lock” to safeguard against declines in average wages during recessions or high inflation. “It’s a reasonable way to increase the state pension over the long run that’s not as expensive but still generates increases,” Cribb said.

Healey said he was committed to cutting the welfare bill. “We must cut the cost of welfare, we have to get more people back into work,” he said. “I know that some of the decisions I must take – and will take – will show the benefits in years to come.” Acknowledging the economic pressures facing households, Healey said: “The country’s under pressure. People are under pressure with the cost of living. Households are feeling that. We’re concerned about the cost of living, and we’re concerned about the cost of business.”

Healey has faced criticism for failing to commit to the goal of raising defence spending to 3 percent of GDP by 2030. In June, he resigned as defence secretary because he was unable to get the Treasury to commit to the target, in what was seen as a fatal blow to the previous government of Keir Starmer. Healey then succeeded Rachel Reeves as chancellor when Andy Burnham became prime minister in July.

Reform UK has said it would cut £80 billion of public spending within five years by reducing welfare payments, net-zero investment, and overseas aid. Speaking at the party’s annual conference in Birmingham, Reform UK’s economic spokesperson Robert Jenrick also pledged to reduce the number of civil servants.