John Healey prepares first UK budget amid inflation and debt pressure

Higher bank-profit surcharge anticipated; higher gambling taxes could add revenue

John Healey is scheduled to stand in the House of Commons on Wednesday to deliver his first budget statement, what is arguably Parliament’s key set-piece of the calendar. Healey became chancellor of the Exchequer in July when Andy Burnham became prime minister, and the statement sets out how the government will balance measures aimed at giving households and businesses breathing space from rising costs against public-service spending, defense commitments and the cost of servicing its debt.

Even though the British economy has been more resilient than anticipated this year and has grown strongly, the government does not have the money to enact many of Labour’s ambitions for restoring the health of the country’s public services.

The backdrop has become more difficult because of economic disruption from the Iran war and constraints in the Strait of Hormuz. The ensuing bottlenecks have squeezed global oil and gas supplies, and the United Kingdom’s economy has been hit, like others, by the inflation they have generated. U.K. inflation has risen to a near one-year high of 3.5% as the war continues to push up fuel prices, and inflation is expected to go higher in coming months.

Healey has said the focus will be on cost of living. In his few comments ahead of the statement, he said he will aim to give businesses and families “some breathing space” from the upward march in the cost of living, and his options could include measures to cushion the blow from higher energy prices.

Burnham has also made pledges about reducing, and even eradicating, homelessness, improving care for the elderly and meeting NATO targets on defense spending. Those commitments will form part of the political context for Healey’s statement.

Revenue could come from the banks, which have benefited from higher interest rates; a higher surcharge on their profits is anticipated. Another revenue source may come from higher taxes on the gambling sector.

The Bank of England is expected to raise interest rates soon, which will further raise the cost to the government of servicing its debt. With bond markets fretting over debt levels around the world, Healey’s budget is expected to be relatively low-key. France has been in the spotlight recently after a wave of protests that exposed serious fiscal strains in the country’s finances.

Matthew Amis, an investment director at Aberdeen Investments, said a “dull budget” could well be rewarded in the financial markets by lower government borrowing costs, which could in the longer run free up extra resources for schools, hospitals and the military. “The one note of caution is that international investors are very quick to punish countries with a weak fiscal story. Just ask France,” he said.

The main constraint facing Healey is the same one that confronted his predecessor, Rachel Reeves, who became chancellor after Labour returned to power in a landslide election victory: the size of the country’s public debt. Even though the trajectory of the public finances recently received a nod of approval from the International Monetary Fund, the United Kingdom’s debt has passed 3 trillion pounds ($4 trillion) for the first time and requires 8% of government spending to service it.

There will be particular interest in what Healey says about defense; anything said on the subject will be noteworthy. Healey quit as defense secretary earlier this year in protest at the lack of money being provided, a move that heaped pressure on Burnham’s predecessor, Keir Starmer. Paying for defense measures would require him to find the money from somewhere else — tax rises or spending cuts — if he is to fend off nervous bond-market investors.