John Healey’s first budget is no time to boost public spending

T his may be the last weekend that I can write about the October 28 budget without being submerged in a wave of coverage. I may still have another go next week, but bear with me. This has been, so far at least, a budget run-up in sharp contrast to the past two years; the air has not been thick with leaks and speculation, though banks are braced for higher taxes. This is a good thing, and the latest figures for gross domestic product (GDP) were testimony to that. The Office for National Statistics reported last week that the economy grew by 0.1 per cent in August and, more importantly, by 0.7 per cent in the June-August period compared to the previous three months. UK economic growth slows but beats expectations This should guarantee a good third-quarter growth figure, suggesting that the economy has so far avoided the second-half slowdown of previous years, which was due partly to statistical factors but mainly resulted from runaway budget speculation. Top stories 1 US inflation hotter than expected as Iran war stokes fuel costs Economics The quarterly figures so far this year suggest that if we were reporting the data in the same way as America, the economy would have grown at an annualised rate of more than 2 per cent. And indeed, August’s figures showed GDP was up by 2.1 per cent on a year earlier, the first time there has been a “2” number since the recovery from Covid four years ago. Resilience in the face of the latest energy shock is the right description for the economy. Advertisement So John Healey, the chancellor , will give his first budget speech this month against a brighter economic backdrop than the one endured by his predecessor, Rachel Reeves, in her two budgets. But he also wants his set piece to be different to hers in another respect: while she appeared to go out of her way to create enemies, sometimes for very small revenue gains, he will seek to avoid that. Top stories 1 Will Lyons: my vintage wine tour of South Australia Inspiration There are two ways you can look at this. One is that her tax increases, big and small, did the heavy lifting. They meant additional annual taxation of £41.2bn by 2029-30 — compared to autumn 2024, the time of Reeves’s first budget — and another £23.2bn in 2029-30 because of last autumn’s event, amounting to a total of more than £64bn in extra taxes. Most commented 1 Starlink deliberately slowed in Ukraine, says Zelensky Russia-Ukraine war 1,130 comments 2 Katie Zacharia departs as Trump’s press secretary after less than a week US politics 699 comments 3 Hundreds of British troops to rehearse Ukraine mission Politics 317 comments 4 Scotland plane crash: boy, 16, and flight instructor, 80, killed Scotland 53 comments 5 All Blacks leave Australia chasing shadows in dazzling first half Rugby union 31 comments The other way is that she grabbed most of the low-hanging fruit that could be picked while sticking to Labour’s 2024 manifesto commitments. Healey’s first budget is thus unlikely to have a tax scorecard on anything like the scale of the past two years. It could be very modest, with some targeted energy support for poorer households and some businesses. If it were going to be much bigger, the jungle drums of Whitehall would be louder. Increasing capital gains tax , widely feared by business, appears to have been rejected because it would be seen as anti-business and with debatable revenue gains. The ready reckoners from HM Revenue & Customs say a significant rise would lead to lower revenues, because of behavioural responses. Advertisement Applying the so-called mansion tax on properties of £1.5m and above, rather than the planned £2m, similarly does not seem to be worth the candle, for small revenue gains. That said, there are two elephants in the room the chancellor must address. The rise in gilt yields , amid a general sell-off of government bonds, will have used up some, perhaps as much as half, of the £22bn in fiscal “headroom” left by Reeves after her last budget. The other is that public spending increases were deliberately front-loaded by Reeves, leaving thin gruel — 1 per cent annual real rises — for the latter years of the parliament. With higher inflation eating into cash plans, the Institute for Fiscal Studies (IFS) says they have become a “work of fiction”, echoing the then-chairman of the Office for Budget Responsibility (OBR) in his description of those left by Jeremy Hunt, the former Tory chancellor. The IFS thinks that Healey will need to find £35bn to put public spending on a realistic footing. If I am reading the runes correctly, the chancellor will not do that. He will choose, for now, to run with a smaller amount of fiscal headroom than his predecessor. And he will stick, again for now, with the “work of fiction” spending totals, knowing he will be criticised for doing so. He will do both these things for the same reason, which is that at a time of great uncertainty, and amid a second energy shock in four years, making big and hard-to-reverse decisions would be a mistake. No decision has yet been taken on whether the first spending review of the Andy Burnham era will be next spring or next autumn, or what the spending “envelope” will be for that review. Advertisement Either way, things could look very different by then globally, with next month’s US midterm elections potentially changing things. That makes sense. Increasing the spending totals at the first sound of gunfire would be the wrong thing to do. There are, the Treasury may say, already substantial increases in spending baked into existing plans, with real departmental spending in 2028-29 already planned to be £40bn higher than was envisaged in the plans that Labour inherited in 2024. Not only that, but an early increase in spending would threaten the clean bill of health presented by the International Monetary Fund (IMF) in its world economic outlook last week. The UK is forecast to deliver the largest fiscal consolidation of any G20 economy between 2025 and 2031, reducing government borrowing by 3.8 per cent of GDP. There has been loose talk of the UK needing an IMF rescue, but on those figures, we are its star pupil. The IMF revised up its UK growth forecast for this year and may need to do so again. When we look at public spending now, ratcheted up sharply relative to GDP since before the pandemic, the standout feature is that it has settled at a much higher level than where it stood then. Due to Covid, it rose to a peacetime record, equivalent to 52 per cent of GDP, in 2020-21, and there was once an assumption that it would then fall back much more sharply. Advertisement Five years ago, in its autumn forecast, and based on government plans, the OBR expected public spending to settle at less than 41.6 per cent of GDP. This was higher than its pre-Covid level in 2018-19 and 2019-20 of 39.2 per cent, but by less than now. Spending last year, 2025-26, was 44.5 per cent of GDP, and for the rest of this decade it is forecast by the OBR to be between 44 and 45 per cent of GDP. Had that forecast five years ago been achieved, last year’s spending would have been £90bn lower, and the budget deficit could have been £44bn rather than £134bn, and much more manageable. It did not happen. We settled for much higher spending, even at a time of dissatisfaction with public services. The energy shock caused by the Russian invasion of Ukraine is one explanation, but so is rising pensioner and non-pensioner welfare bills, and increased health spending without a matching increase in productivity. On OBR figures, this will be the highest peacetime decade for public spending, averaging 45.1 per cent of GDP. So, this is no time for even higher spending, despite the pressures to increase it further. Healey will be right to wait for more favourable circumstances, which could push down the cost of government borrowing and help in other ways. More to the point, next year’s spending review should be all about generating public sector productivity and efficiency gains, so lessening the need for the chancellor to splash the cash. Advertisement Tough spending totals are one way to help achieve this. NHS productivity rose strongly in the 2010s. Labour may also want to score potential savings from the prime minister’s proposed reworking of the state pension triple lock. The bottom line is that tax increases to pay for more spending largesse would be the wrong thing to do. PS Having highlighted the economic damage from Brexit here many times, it was encouraging to see the prime minister seeking to reduce some of that damage by moving to closer relations with the EU . The potential gains are significant. Economists at investment bank Goldman Sachs, in a note to clients, say there is a “large economic upside” from closer EU relations. They estimate the cost of Brexit so far to be 6 per cent of GDP — about £190bn based on this year’s GDP. Staying with the status quo would provide limited benefits, mainly from negotiating sector deals, but the Goldman analysis says that forming a customs union would boost GDP by 1 per cent, while the biggest benefits short of full membership would come from rejoining the single market, which would provide a GDP boost of between 2 and 5 per cent — though managing the politics of freedom of movement would be tricky. The most notable non-EU single market members are Norway and Iceland. It may be, of course, that this comes to nothing. But closer EU relations clearly offer an opportunity. [email protected]