{"text":[[{"start":5.842,"text":"John Healey, Britain’s chancellor of the exchequer, was until June in charge of the country’s defence: a deadly serious politician known for his sombre statements on national security. Now he is the man in charge of talking up the UK’s economy."}],[{"start":21.35,"text":"The shift in tone has not come easily. In his first major speech this month as chancellor, with two mildly sinister robotic arms stationed behind him, Healey declared Britain was “turning a corner” but was largely focused on reassuring markets he was not going to do anything reckless. Critics said he sounded as if he was preparing the country for war. One government insider acknowledged: “It didn’t scream positivity.”"}],[{"start":44,"text":"The chancellor and his boss, Prime Minister Andy Burnham, took office in July determined to project optimism. But ahead of a crucial Budget next month, the economic walls are closing in."}],[{"start":55.84,"text":"The UK government’s room for manoeuvre has been dramatically cut by the continuing fallout from the Iran war and a global bond sell-off that has forced up Britain’s borrowing costs to levels not seen since before the 2008 financial crash."}],[{"start":68.443,"text":"Now an administration seeking to provide the feelgood factor that eluded its predecessor faces pushing through yet more tax rises when the government’s take of national income is already approaching a postwar high."}],[{"start":null,"text":"

"}],[{"start":80.717,"text":"More than that, Burnham and Healey appear to have been taken by surprise by just how precarious Britain’s fiscal position has become."}],[{"start":87.28,"text":"“Core to this fiscal crisis is the seeming inability of the government to recognise it,” says Stephen Jones, chief investment officer at Aegon Asset Management, who describes the government’s “current inability to act [as a] simple denial of the hard reality, versus a market all too well aware of the delicacy and unsustainability of the UK situation”."}],[{"start":107.88,"text":"Healey discovered he would become chancellor just days before he entered the Treasury, giving him no time for the customary meetings with officials to see the state of the government’s books ahead of taking power."}],[{"start":124.16,"text":"“I don’t think John Healey knew; I don’t think Andy knew,” says a senior Labour official. “Until you get the proper briefings you can only know so much. John was not in access talks with the Treasury until it was way too late.”"}],[{"start":144.24,"text":"Ahead of replacing the unpopular Sir Keir Starmer as prime minister, Burnham had hinted at big spending plans: ending a freeze on the tax-free personal income tax allowance, nationalising troubled Thames Water, compensating women affected by the rising state pension age and a big increase in council house building. So far none has happened."}],[{"start":153.479,"text":"Burnham also famously declared last year that he wanted Britain to “get beyond being in hock to the bond markets”. But those markets are the ominous backdrop to Healey’s first Budget."}],[{"start":163.868,"text":"Healey’s predecessor Rachel Reeves pushed through hefty tax increases in November 2025, in large part to replenish the government’s fiscal buffer — its margin for manoeuvre. But by the time Healey gives his own budget on October 28, half or more of the £24bn buffer bequeathed by Reeves could be wiped out because of higher borrowing costs."}],[{"start":null,"text":""}],[{"start":184.56,"text":"That raises the prospect that the UK government may have to increase taxes just to stand still. Treasury insiders admit to being glued to market screens."}],[{"start":194.48,"text":"“I think everyone shares Andy Burnham’s desire not to be in hock to the bond market,” says Rupert Harrison, senior adviser at asset manager Pimco and former chief of staff to Conservative chancellor George Osborne. “But in this environment it’s the bond market that’s defining his Budget choices.”"}],[{"start":209.2,"text":"Successive Labour and Conservative chancellors have been faced with the same bleak fact: Britain’s economy is not growing quickly enough to fund an ageing population, defence, housing, creaking infrastructure or welfare. Government finances are, as a result, deeply reliant on debt."}],[{"start":228.492,"text":"UK growth outpaced that of other G7 nations in the first half of the year and there are signs of improving business confidence. But the economy still bears the scars of the global financial crisis and the pandemic."}],[{"start":241.451,"text":"GDP per capita would be 30 per cent higher today if the pre-2008 trend had continued, according to the Office for Budget Responsibility, the country’s fiscal watchdog. Then there is the legacy of Covid, which has pushed up debt still further. In real terms, per capita GDP has barely increased since the eve of the pandemic: in 2019 it was around £40,100 — seven years later it is about £40,500."}],[{"start":267.251,"text":"While the government has not balanced its budget since the dawn of the century, public spending has surged to 45 per cent of GDP, around its highest levels for five decades outside the financial crisis and the pandemic."}],[{"start":280.988,"text":"In recent years governments have shied away from cutting big areas of public spending, notably the welfare bill — now £333bn a year — including the rising cost of the state pension. Adding to the pressure is debt interest — currently being driven up in the bond market sell-off — which at £110bn is more than the government spends on the military."}],[{"start":303.44,"text":"Healey quit Starmer’s government in June in protest at Reeves’ failure to find the extra £10bn a year needed to take defence spending to 3 per cent of GDP in 2030, claiming that the then chancellor had failed “to commit the resources that the nation needs to defend the country at this time of rising threats”."}],[{"start":318.56,"text":"But he has now been forced to delay any decision on when to reach the 3 per cent target until a spending review next year — when defence will be jostling for cash with other priorities. In response to Healey’s discomfort, an ally of Reeves just texted “Lol”."}],[{"start":333.08,"text":"Britain is far from alone in being hit by the fallout of the global bond rout. But the country is especially exposed. Amid the UK’s structural fiscal and economic problems, the yield on its benchmark 10-year bonds has been the highest in the G7 since early 2025, making the financing of new debt more costly than for its peers."}],[{"start":null,"text":""}],[{"start":353.76,"text":"Healey has blamed the past Conservative government — including former prime minister Liz Truss and her market-spooking 2022 “mini” Budget — but investors have also been concerned about Burnham’s apparent instinct to spend money that does not exist."}],[{"start":367.6,"text":"“The biggest lesson of the last few weeks is that if there are different messages coming from Number 10 and Number 11, the markets will listen to Number 10,” says Sir Jeremy Hunt, former Tory chancellor. “Unless there is a united message when it comes to discipline on spending, the UK premium on bond yields will stay.”"}],[{"start":386.187,"text":"If he was not alive to the need to manage the bond markets before he became prime minister, Burnham is now. In the past few weeks both he and the chancellor have given interviews to the FT stressing the need for fiscal discipline as the “bedrock” of their growth strategy."}],[{"start":386.687,"text":"Wile E Coyote and the flame of optimism"}],[{"start":401.92,"text":"In some ways, Burnham has made a propitious start as prime minister."}],[{"start":409.781,"text":"His cheery demeanour and ability to speak directly to voters about the concerns of their daily lives have gone down well with voters — as have his pledges to ease costs for households and businesses. Labour has now moved ahead of Nigel Farage’s Reform UK in the polls, as the rightwing insurgent party has been hit by a series of financial scandals."}],[{"start":410.281,"text":"But Rob Ford, professor of politics at Manchester university, speaks of a “Wile E Coyote moment”, when the prime minister’s favourability ratings, shored up by low-cost giveaways such as a reduction in VAT on energy and a cap on bus fares, come up against the laws of political and economic gravity."}],[{"start":410.781,"text":"“He has been selling a politics of hope over the summer, but that is not cheap,” says Ford. Labour’s people-pleasing prime minister may have to “make difficult decisions that let people down”."}],[{"start":411.281,"text":"The fiscal picture has darkened since the early days of 2026, when Reeves hoped that Britain was about to bounce back. Treasury officials had been feeling increasingly optimistic in February as they watched the 10-year bond yield heading down towards 4 per cent for the first time since the lead-up to Reeves’ first Budget in 2024."}],[{"start":413.52,"text":"The Bank of England appeared to be on course to hit the 2 per cent inflation target, opening the door to a seventh interest rate reduction. Instead, the war has confounded those hopes, with the oil price exceeding $100 this month."}],[{"start":430.64,"text":"Amid a global bond sell-off spurred by inflation fears linked to the Iran war, the UK’s 10-year yield this month hit 5.4 per cent, the most since 2007, while an auction of 30-year debt last week was priced at the highest interest rate on any gilt issuance in almost three decades."}],[{"start":449.44,"text":"Such shifts are enormously consequential for the UK’s Budget arithmetic given that the country spends £1 in every £10 on debt interest."}],[{"start":459.405,"text":"Indeed, the surge in yields comes as the OBR is preparing its estimates of government borrowing costs — a key part of economic forecasts by the fiscal watchdog that will underpin the Budget."}],[{"start":470.852,"text":"The prime minister and chancellor have sought to distinguish themselves from the unpopular Starmer and Reeves, who introduced £68bn of tax rises in 2024 and 2025, the biggest pair of revenue-raising Budgets, when adjusted for the size of the economy, in more than half a century."}],[{"start":null,"text":""}],[{"start":489.882,"text":"The political danger for Burnham is that his political momentum will be sapped by a tax-raising Budget focused not on raising money for Labour’s policy priorities but on repairing fiscal damage stemming from a war not of Britain’s choosing."}],[{"start":503.528,"text":"Andrew Goodwin, chief UK economist at Oxford Economics, says that any fiscal loosening — more borrowing or a smaller buffer — in the Budget “would likely cause markets to react badly”."}],[{"start":515.12,"text":"Among the more eye-catching measures in the Budget will be a “road map” towards devolution of a share of income tax and business rates to local areas. But while this plan dovetails with Burnham’s decentralisation agenda, the move was originally launched by Reeves and is likely to be fiscally neutral."}],[{"start":532.55,"text":"“This government has inherited a lot of the challenges and constraints that the last government faced,” says Isabel Stockton, an economist at the Institute for Fiscal Studies."}],[{"start":542.16,"text":"“We have to get used to a level of debt interest servicing costs that we were not used to throughout the 2010s,” she adds. “And on public spending there are these big defining changes: we are in a situation where we are trying to bring up defence spending when we are spending a lot more on healthcare and welfare including pensions.”"}],[{"start":562.55,"text":"Mahmood Pradhan, a former IMF official who is now a non-resident fellow at the Bruegel think-tank, says the Treasury will have to face fiscal trade-offs given the limited buffer or headroom against the government’s self-imposed borrowing rules."}],[{"start":573.931,"text":"“It would not be comfortable for Healey to live with headroom that is half the levels forecast in March,” he says. “If there are to be tax increases I suspect he will be inclined towards higher taxes on capital, potentially combined with some welfare savings — though these would take time to deliver.”"}],[{"start":588.08,"text":"Business, banks and the wealthy are already braced for the government to turn to them — again — for the tax revenues needed to patch up the public finances."}],[{"start":597.857,"text":"JPMorgan Chase chief Jamie Dimon has warned of “consequences” of another tax raid on the banks and saw both Healey and Burnham in Downing Street last week."}],[{"start":609.12,"text":"Meanwhile Chris Rokos, a hedge fund billionaire who paid £330mn in taxes a year, has become the latest high-profile financier to decide to leave the UK. Burnham insisted in his FT interview he did not want to drive the wealthy out of Britain."}],[{"start":622.135,"text":"Healey has spoken of the need for the Budget to maintain “confidence” in the British economy and is acutely aware of the risks of damaging fragile business sentiment with more tax rises."}],[{"start":631.594,"text":"But staying on course when it comes to deficit reduction will also be critical if the chancellor is to avoid giving the BoE further reason to raise borrowing costs."}],[{"start":640.452,"text":"Already, BoE Governor Andrew Bailey looks like an international outlier as the Monetary Policy Committee prepares to decide whether to keep rates at 3.75 per cent on Thursday even as other central banks — notably the Federal Reserve — consider rises."}],[{"start":655.26,"text":"“It would not take much to swing the MPC in favour of a rate rise, and looser fiscal policy in the Budget would be one trigger,” says Pradhan."}],[{"start":null,"text":""}],[{"start":662.248,"text":"Under the fiscal rules, Healey needs to bring the difference between tax revenues and day-to-day spending into surplus by the end of the parliament. While estimates of that headroom vary, the Resolution Foundation think-tank created a stir last week by predicting it had dropped to just £5bn."}],[{"start":677.798,"text":"That would be a similar level to the OBR forecast ahead of Reeves’ last Budget — a margin so thin that she considered a politically hazardous plan to increase income tax before ultimately raising revenue through other changes."}],[{"start":691.9,"text":"Healey’s task in the Budget is not to snuff out any economic optimism."}],[{"start":695.512,"text":"One huge question is whether he will focus on restoring the government’s fiscal buffers or whether he will seek higher tax increases to fund its longer-term goals."}],[{"start":704.351,"text":"If the chancellor concentrates on repairing the economic collateral damage from the Iran war, it will leave open how he pays for Burnham’s priorities in areas including defence and social care."}],[{"start":715.91,"text":"Asked by the FT in the interview whether he would need a spring Budget given the big decisions that loom in next year’s spending review, which will lay down day-to-day departmental expenditure plans until the end of the parliament in 2029, Healey declined to outline any timetable."}],[{"start":731.92,"text":"It remains a mystery how he will make the sums add up. Previous chancellors have tested the limits of the public’s and markets’ tolerance for higher taxes and borrowing, while Labour MPs have shown no appetite for big spending cuts, especially to welfare."}],[{"start":746.063,"text":"The election option"}],[{"start":747.31,"text":"Burnham will set out his longer-term objectives for government in a 10-year plan after the Budget — probably in November — and Healey will then be given the unenviable task next year of working out how to pay for them. Government insiders allow themselves to hope that rising productivity and growth will come to the rescue, plus perhaps some luck: notably if the Iran conflict finally ends."}],[{"start":768.47,"text":"There is an alternative scenario, increasingly discussed by Labour MPs: could Burnham postpone the agonising tax and spending choices looming in 2027 by holding an early general election in the hope of winning a new mandate to address the long-term issues facing the country?"}],[{"start":786.08,"text":"The argument runs that if Burnham could persuade the country to endorse a plan to bolster the country’s defences, tackle the welfare bill and sort out its social care crisis, he might also persuade voters to accept the need for tax rises or spending cuts to pay for it."}],[{"start":802.16,"text":"Ending Britain’s costly “triple lock” mechanism for increases to the state pension, building a closer economic partnership with the EU and dropping the promise not to increase the main personal taxes have all been floated as Labour manifesto offers. Why not go to the country while Burnham is popular and both Reform UK and the Conservatives are struggling?"}],[{"start":null,"text":""}],[{"start":820.883,"text":"But there are big problems with the idea. Burnham has a massive Labour working majority in the House of Commons of 166 and can continue governing for almost three years before he needs to go to the polls again. Even in the best-case scenario, the prime minister would return from an election with a shrivelled majority and hand Reform a parliamentary breakthrough."}],[{"start":843.301,"text":"And would voters really reward a party campaigning for a mandate to put up personal taxes, cut future pensions and reopen some of the traumas of Brexit? “The potential for losing their majority altogether is pretty big and the case for an early election is pretty weak,” says Ford, of Manchester university. “So far nothing in Andy Burnham’s agenda is something that requires an election to get a mandate for.”"}],[{"start":867.44,"text":"Some Labour MPs acknowledge the temptations of going to the polls rather than actually confronting hard economic choices next year. “The whole spending review doesn’t add up,” says one. “That’s why people talk about an early election.”"}],[{"start":881.58,"text":"In any event, cold economic reality is about to intrude on the Burnham honeymoon when Healey delivers his first Budget next month. As a former Labour minister put it: “The world is the world, no matter how optimistic or happy you are.”"}],[{"start":896.24,"text":"Additional reporting by Ian Smith"}],[{"start":897.12,"text":"Data visualisation by Keith Fray"}],[{"start":903.52,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1789744999_9038.mp3"}