Healey's Budget Must Sustain a Stronger Economy Through Gathering Clouds

The security around this week's Budget reads like something from the intelligence world. Chancellor John Healey's aides have divided the package into compartments, and very few people can see all of them. There are codenames, the IT has been locked down, and ministers who view the plans must sign a digital pledge not to brief journalists. The reason is last year's Budget, when speculation, some of it informed by insiders, was seen as economically destabilising. Healey, until recently defence secretary, has taken to the discipline readily, and in recent interviews he has held the line like his fellow Yorkshireman Geoffrey Boycott at the crease.

He has good news to work with. UK growth was 0.6% in the first quarter and 0.5% in the second, making Britain the fastest-growing G7 economy so far this year. The expected stagnation in the second half has not arrived, and the third quarter is heading for 0.6 to 0.8%. Every quarter has come in at roughly twice the pace the Office for Budget Responsibility forecast in March, and the first eight months of the year are the fastest start since 2017, setting aside the post-lockdown reopening. The International Monetary Fund has said the UK stands out among G7 countries for at least planning to cut borrowing. Bond traders who once fixated on British borrowing costs now talk more about the gap between French and German yields, and about America's long-term debt.

The contrast with 2022 is sharp. Then the Ukraine war, huge energy bailouts and Liz Truss's mini budget left the UK with the highest borrowing costs in the G7, a penalty markets mocked as a "moron premium". Last year, amid repeated policy U-turns, British borrowing costs rose most in the G7. This year the gap has narrowed. Reforms to the electricity market have weakened the link between gas and electricity prices, and the Iran war has so far been more an oil shock than a gas shock, which is the one where the UK is more exposed. Heavy AI and tech investment has also helped the figures.

But there are clouds. Inflation rose to 3.5% in September, more than forecast, and borrowing also overshot. A Bank of England rate rise is now very much on the cards, which would push up mortgage repayments for some households. Come January, typical energy bills are predicted to rise 16%, interest rates may be higher, and fear of an AI bubble bursting persists. Prime Minister Andy Burnham and Healey have so far leaned on inexpensive "feel-better" measures, such as capped bus fares and a temporary VAT cut on household energy bills, designed to lift confidence without much spending. There is little spare money for more.

At a robotics research facility in Coventry last month, Healey said the global conditions made things hard but that Britain had great talent and deep capital markets. The task, he said, was to balance the books and control public spending, with himself and the prime minister "in lockstep" on meeting the fiscal rules with a buffer. The author's reading of three recent interviews is that he is more intent on impressing markets than on explaining himself to his own MPs, who want help with the cost of living.

Healey served five years as a junior Treasury minister under Gordon Brown, from 2002 to 2007, and wore Brown's old tie to the Labour conference. But Brown's Treasury ran a surplus, while today's runs a £120bn deficit on top of £3 trillion of national debt. Asked whether he would revisit the changes that proved so hard for Rachel Reeves, he answered "100%", saying the money of the 1990s is gone, the public aren't daft, and fiscal discipline must run through the Budget or debt costs won't come under control. One notable element is a push to save on welfare, aiming to bring some of the 1.35 million people off work with mental health problems back into jobs. Reports suggest some younger claimants could see payments cut, with more spent on in-work therapy and job support.

There was no OBR in Brown's day, when late arithmetic problems could be fixed with an optimistic forecast tweak. Now the OBR's view of the welfare savings and of stronger GDP matters enormously, alongside manifesto red lines, bond markets, debts and the energy shock. Some of the hardest choices, such as funding defence and social care, may be pushed beyond this Budget. A settled Iran war and revised statistics could prompt the OBR to rethink last year's downgrade to long-term growth, potentially improving the public finances by tens of billions. Former Treasury officials note that there is always a reason for procrastination.

The real tests come on Wednesday, around 13.00, when Healey sits down. The OBR's borrowing tables will matter more than the speech, and the Debt Management Office's gilt remit will show whether markets are persuaded.