Andy Burnham has appointed John Healey, the former defence secretary, as chancellor. It was certainly a surprise. Home secretary Shabana Mahmood had been seen as a certainty for the job at No. 11, but at the last moment The incoming prime minister, appointed Healy instead. The markets were relieved. Given that the potential alternatives were Ed Miliband or Angela Rayner, that is not saying very much.
Still, at defence, and as a former minister in Gordon Brown’s Treasury, John Healey carved out a reputation as a tough and effective minister. For now investors will trust him to stick to the fiscal rules and at least make some efforts to control the huge rise in public spending. The choice is better than could have been hoped for a few weeks ago.
The trouble is, Rachel Reeves has left behind a dismal inheritance. After less than two years in office, growth has stagnated, real wages are stuck, investment has been crushed, retail, hospitality and manufacturing have been suffocated by higher taxes, and unemployment has begun to steadily rise. Meanwhile, borrowing is starting to run out of control, overshooting even the £70 billion increase planned in Reeves’s first Budget, and the cost is rising all the time, with the country now spending £125 billion a year on debt interest alone.
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If Healey is to have any hope of fixing that and saving the government from a financial crisis, he will have to make it clear he is making some decisive changes and is willing to make them right away. It won’t be easy. But here are three places he could start.
1. Schedule an early Budget
To begin with, he should schedule a Budget for early September. Parliament can always be recalled for a few days if necessary. One of the worst mistakes Reeves made was to allow months of speculation about which taxes might go up. It will be even worse under Burnham, who is at his happiest when pandering to the free-spending wing of his party. A wealth tax? A steep rise in capital gains tax? A lower threshold for the mansion tax? A land value tax? Each time one or other option is floated in the media, assets are sold or reorganised to try and minimise the impact. It damages the economy, and you don’t even raise any revenue. The best thing John Healey could do is to set out what his plans are as quickly as possible. At least that way, all the damaging speculation would be brought to an end.
2. Stop battering businesses
Next, John Healey should call off the war on wealth creators. He should make a big speech within the next few weeks praising entrepreneurs, start-ups and small businesses. Another big mistake Reeves made was to relentlessly batter businesses, and new small businesses in particular, with an endless series of levies, charges and new rules. She made them feel that their staying in business was not worth the effort, and increasingly that feeling was unfortunately justified. Apart from the increase in employers’ national insurance, none of them raised very much money, and they all crushed the life out of companies. Instead, Healey should offer one major concession such as restoring the 10% rate of CGT for entrepreneurs or exempting family businesses from inheritance tax. It would hardly cost anything and would send out a signal that enterprise was back in favour.
3. Reform welfare spending
Finally, John Healey must start making serious cuts to welfare spending. We don’t have any real idea what Burnham’s plans are, but they will be expensive. A lot more money will have to be found from somewhere – not least for defence given Healey’s previous stand on this issue – at a time when the government is already breaking through its borrowing limits. Welfare spending is already projected by the Office for Budget Responsibility to go above £400 billion by 2030, and given the rate at which it is rising, may well go much higher.
Unless that can be controlled, the country faces endless tax rises, with no improvement in services and with no money left to do anything else. Welfare will simply consume every spare penny. At defence, John Healey showed he is capable of tough decisions and doesn’t mind confronting his party. He will have to do the same as chancellor – he had better make a start from the very first week.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
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