Burnham and Healey must avoid the budget mistakes of Starmer and Reeves

John Healey and Andy Burnham are reported to have only recently discovered that the public finances are in dire straits. In a marked change of tone from the optimism of first couple of months of his premiership, the prime minister is now warning about “difficult decisions” ahead.  

To claim this is a new discovery is laughable. The impact of the Iran war made the last OBR forecast – published in March – out of date before Rachel Reeves even presented it to the House, as Burnham and his chancellor surely noticed. And the fiscal situation is set to become even more challenging, with lower growth, higher interest rates and higher inflation are all likely to worsen the outlook for tax receipts or make spending plans even tighter. The IfG was not alone in pointing this out before Burnham replaced Keir Starmer in July.

Politicians of all parties frequently feign ignorance about fiscal reality, but if the PM and chancellor are (finally) alive to the challenges facing them then they must deliver a budget that meets them head on. This means grappling with the problems the economy and public finances face and presenting a coherent strategy for fiscal policy for the rest of this parliament and beyond.

Burnham and Healey risk repeating their predecessors’ mistakes

If this tale feels familiar, it is because we were in a very similar position two years ago. Starmer and Reeves claimed to be surprised by never-before-seen HMT figures about in-year spending commitments just weeks after taking office. Whether or not those specific pressures were apparent from the outside, many other pressures were. The plans both main parties committed to during the general election campaign were never deliverable, and both Labour and the Conservatives made the unwise commitment not to raise the main rates of income tax, national insurance and VAT.

The 2024 budget saw Reeves increase spending, as she had to. But as the least economically damaging tax rises were already ruled out, Reeves turned to Employer NICs – an unpopular measure with businesses that damaged confidence and undermined her claimed commitment to growth above all else.

With the absence of a clear vision for improving the tax system compounding the chilling effect of the NICs change on business confidence, the budget – even though it raised taxes substantially – still left the government vulnerable to a small forecast deterioration. This would blow the government off course and create further uncertainty over the following year.

Burnham, aided by Healey, has learned from some of Starmer’s and Reeves’s mistakes by focusing on upbeat short-term announcements rather than the momentum-sapping doom-laden warnings of 2024. But the PM and his chancellor have failed to prepare the ground for difficult decisions – not least on defence, which Healey knows better than most – that are inevitably coming. They re-committed to the tax lock and made other commitments, seemingly without assessing the overall fiscal picture and understanding what is and is not affordable. History is, despite promises to be a different kind of government, repeating itself just two years after the 2024 budget came unstuck.

Healey needs to present a budget that is fit for the challenge

The first budget of the Burnham administration will also be the last budget of this parliament not viewed as a ‘pre-election’ event. So rather than postponing decisions to March, or even later, this is the right – and last – moment for John Healey and Andy Burnham to act decisively and make big fiscal adjustments that the public will understand.  

They should ensure the envelope for next year’s spending review is compatible with their defence and other commitments. And they should set out a tax strategy that explains how the measures they are delivering are designed to promote growth through improvements to the system while providing a clear signal about what future tax changes are and are not on the table. They should do all this while retaining enough fiscal flexibility that their plans are viewed credibly by markets and are not vulnerable to small future deviations.

Such a budget would be difficult to deliver, but the alternative is a big gamble on forecasts improving. This could happen – at some point the ONS’s revision to past productivity performance might feed into a rosier view about future growth; the situation in the Hormuz strait might resolve. But most chancellors who have gambled on the forecast in the past 15 years have lost. And after taking difficult decisions now, Healey would be able to use any good news to increase spending or cut some taxes nearer the election. 

The question of early prisoner release was the first real test of Burnham’s premiership, and the new PM took the political route that entailed least short-term pain but stored up more problems for the future. That is an option the prime minister could take at the budget, but it would be the wrong one. How Andy Burnham approaches the defining test of his early premiership will reveal his government’s capacity to handle big challenges and communicate their necessity to the public.