John Healey faces a ghastly dilemma, worsened by the fact that it is of his own making. As defence secretary, Healey resigned over the chancellor’s failure to ensure the funding for the UK to meet its defence needs. On October 28, the current UK chancellor, J Healey, will deliver his budget. Either he commits to the level of defence spending he once demanded, which would mean making some drastic cuts elsewhere, or he must go through painful contortions to try to justify his failure, sparking inevitable charges of gross hypocrisy.
He is said to be scraping together as much cash as he can for defence, but the total will fall well short of what is needed. The temptation might be to delay details on significant spending plans, kicking them as far as he dares into next year. That would incense the defence chiefs and dangerously discomfort the bond markets.
His boss might not wish to be “in hock” to the bond markets, but the UK most certainly is at their mercy. Last week the IMF was relatively complimentary about the UK’s plans to cut spending, but these are only promises, not actual cuts, and the government’s reluctance to actually upset voters breeds some cynicism about when the axe might fall, particularly on welfare.
The titbits that are dripping from No 11, despite assurances there would be no budget leaks, indicate that money will be redirected from green projects towards defence, and a levy on banks might go towards giving people “some breathing space”. What the markets want to hear, though, is how the chancellor proposes to shrink the government’s massive debt. At the end of June, that stood at £2.9tn, equivalent to almost 95% of GDP. In 2007-08 the ratio was just 35%.
All that borrowing might seem more palatable if one could point to the wonderful range of assets it had funded – but grand projects, or even modest social housing improvements, have been scarce. Much of the money vanished into coping with the financial crisis and then the Covid pandemic.
And while some other European countries have even higher levels of debt, they tend not to face such heavy interest costs: in the last financial year, servicing those loans cost the UK £109bn because around a quarter of the debt has the bonus for lenders of being inflation-linked.
The war in the Middle East will bolster their returns, but adds to the pressure on Healey to show how he will bring down the debt, constrained as he is by the government’s continuing pledge to stick to the manifesto promise of not raising taxes on “working people”.
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With such limited room for manoeuvre, he might resort to recycling traditional budget promises. A pledge to close the “tax gap” could be trotted out again, but should be viewed with heavy scepticism. The government estimates the gap between what it is owed and what the taxman collects to be around £60bn, ironically roughly the same amount currently spent on defence. Cash that is not already squirrelled safely away in trusts or offshore is currently being carted off by departing millionaires.
Similarly, beware assurances that there will be savings from cuts to the civil service: the shuffling of departmental titles has not guaranteed fewer jobs under previous regimes and now there are two No 10s to keep running – and between which civil servants must travel.
Cuts to the welfare bill could produce chunky savings very quickly, but appalled Labour backbenchers quickly stymied Keir Starmer’s plans in that direction. With a new leader and high in the polls, if the government wants to tackle this issue, there will never be a better time. Andy Burnham ventured to dip a prime ministerial toe into this piranha tank with a suggestion that he would dilute the triple lock on state pensions, but not until April 2030.
Healey needs to find cash now. His budget will be judged on what he does, not what he promises to do.
