Budget: How Chancellor John Healey can avoid becoming the Labour Liz Truss

Chancellor John Healey needs to retain the confidence of the markets, like his predecessor Rachel Reeves. Picture: Stefan Rousseau/pool | AFP via Getty Images

It’s probably fair to say that Chancellor John Healey’s predecessor, Rachel Reeves, was not particularly popular. Her starring role in Keir Starmer’s avowedly gloomy government endeared her to few.

However, she had at least one thing going for her: her insistence on her ‘fiscal rules’ meant the markets trusted her. That may sound nebulous but it had a real effect on government borrowing costs.

An enduring example of what happens when that confidence is lost was provided by the short-lived economic experiment carried out by Liz Truss and co during their disastrous but instructive reign of error.

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UK economy doing relatively well

In a new report, the International Monetary Fund says it expects the UK’s gross domestic product to grow by 1.3 per cent this year, up from a previous forecast of 1 per cent. So, despite global turmoil and high energy prices, Britain is doing relatively well, although inflationary pressures could change that.

IMF chief economist Silvana Tenreyro warned Healey must continue the government’s plan to bring day-to-day spending in line with tax revenues by 2029-30, despite pressure to spend more on defence, in particular.

"The UK has already started the (fiscal) consolidation path,” she said. “It is ⁠on that trajectory, and the message for the UK is simply stay the course...”

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Spending cuts required to fund defence

As Healey well knows, the defence budget must increase, but not at the cost of what credibility the UK has with the markets. This means the Chancellor needs to find other means of paying for the necessary extra spending. With taxation and borrowing at historically high levels, there is little scope for further increases, which leaves spending cuts as the only real option.

Labour must also take sensible economic decisions, such as approving planned North Sea oil and gas projects, which, according to a new report, would add £10.8 billion in economic value over the next decade.

Governments largely stand or fall based on the economy. If Labour rejects the Rosebank field and other such schemes, the result could be election defeat for a party committed to net zero and its replacement by one that would abandon it entirely. Something for the more politically unsavvy environmentalists to ponder.