Healey Plans Short-Term UK Budget Giveaways to Limit Fiscal Pain

Chancellor of the Exchequer John Healey wants to help British voters with the cost of living while staying within the limits of his country’s stretched public finances. To square this circle, he’s planning a series of strictly short-term giveaways — and hoping the war in Iran comes to an end.

At the budget on Oct. 28, Healey is due to unveil more support for energy costs this winter, including through an existing policy called the warm homes discount. The extra spending will leave his key fiscal target largely unaffected, however, because it will expire before 2029-30 when the government’s main budget rule bites, according to people familiar with the matter who requested anonymity discussing government plans.

A global rise in borrowing costs, triggered by the US-Iran war, is estimated to have halved the £23.6 billion ($31 billion) of headroom against Labour’s main fiscal rule: that day-to-day spending should be covered by tax receipts by the end of the parliament. Yet Healey’s planned cost-of-living measures will unwind before 2029, with other policies under consideration including a temporary cut to VAT on petrol and extending a freeze on fuel duty, the people familiar with the matter said.

Time-limited help for voters will be consistent with the approach already started by Prime Minister Andy Burnham, who announced a six-month cut to VAT on household electricity bills starting from Oct. 1 when he became premier earlier in the summer.

The chancellor is also comfortable with “looking through” the impact of the US-Iran war as a temporary shock that doesn’t require a wholesale change in the government’s fiscal stance to rebuild his headroom, one of the people familiar said.

“The consensus seems to be he’ll allow headroom to drop a little in the medium-term which means he doesn’t have to do big tax rises,” said Tom Pope, chief economist at the Institute for Government think tank. “And then he’ll announce cost-of-living support in the short-term.”

Healey and Burnham’s economic hope is for a quick end to the US-Iran war, which has been hitting Britons with higher energy costs and hurting the government’s budget position, according to the people familiar. Healey doesn’t want to commit to major new tax hikes or spending cuts now when an improving economic picture from 2027 onwards — if the Middle East conflict de-escalates — would render them unnecessary, one said.

Similarly, the problem of how the UK will raise defense spending to 3% of GDP by 2030 — which Healey called for when he was defense secretary, and is yet to formally commit to as chancellor — will be easier to address if the war has abated and the government’s budgetary position has improved, one of the people said.

To be sure, Healey will still need to fund his short-term cost-of-living measures, either through tax hikes, spending cuts or an increase in borrowing. Tax-raising measures the Treasury has been considering in the run-up to the budget include a windfall levy on the profits of banks and oil and gas companies, according to people familiar with the matter.

Tough UK Budget Hangs Over John Healey at Labour GatheringHealey Pledges Fiscal Restraint in Bid to Reassure InvestorsInternal UK Forecasts Raise Risk of Growth Downgrade Due to WarCity of London Fears Windfall Tax on Domestic Banks in UK Budget

Nevertheless, Healey has room to rely on borrowing to fund his short-term cost-of-living package. He is helped by the nature of Britain’s secondary fiscal rule, which requires debt to be falling as a share of GDP in 2029-30, a target the government was meeting by a margin of £27.1 billion at the last fiscal event in the spring. The rule means that, even if Healey pushes up borrowing by billions of pounds in the next few years for short-term voter giveaways, he can still comfortably hit the government’s debt target because the borrowing will have been temporary.

“If they do breathing space-style measures, I wouldn’t be at all surprised to see that those are temporary and done through borrowing,” said Helen Miller, director of the Institute for Fiscal Studies, speaking in a phone interview. “The risk with some of these things, even if they are announced to be temporary, is they might end up being permanent,” Miller said, noting how the temporary freeze in fuel duty first announced in 2011 has been maintained ever since.

A tougher constraint on borrowing might come in the reaction of investors, who are already demanding multi-decade high lending rates of the British government. The UK has been caught in a global rise in borrowing costs linked to higher inflation expectations because of the US-Iran war pushing up energy prices.

“Bond markets care about borrowing in the short-term,” Pope, from the Institute for Government, said. “Given where markets are, you do still need to worry about their reaction quite a lot.”

Calm Before the Storm

Healey has sought to bring more calm and order to the run-up to this year’s budget, after last year’s fiscal event was preceded by weeks of destabilizing and often misleading speculation. To top it off, the details of then-chancellor Rachel Reeves’ budget were accidentally leaked an hour early.

As part of that effort this year, the UK Treasury asked the Office for Budget Responsibility to provide a “round zero” baseline forecast before the 10-week budget process began, according to two people familiar with the development.

In the past, the Treasury has had to wait about two weeks for the fiscal watchdog’s first economic projections, leaving just eight weeks to the budget. Until it has that forecast, it is not clear how much fiscal room there is.

A Treasury spokesperson said they could not comment on the forecast process. “The Chancellor is focused on giving households and businesses a bit of breathing space where we can,” a spokesperson said, citing existing policies on energy and transport costs.