John Healey Budget warning: UK faces tough autumn amid Middle East inflation shock

Chancellor John Healey has issued a John Healey Budget warning, saying the UK faces a difficult autumn fiscal statement as the US war in the Middle East pushes up inflation and borrowing costs. Healey told the Financial Times he would ensure the country emerges from the Budget on 28 October with a solid ‘buffer against uncertainty’.

The warning came alongside a rise in Government borrowing earlier this week, which reflected concern among lenders about the inflationary effects of the ongoing conflict. Healey told the Financial Times directly: ‘What’s happening in the Middle East is hitting inflation, it’s hitting growth, it’s hitting borrowing costs.’ He added that the situation was ‘part of a more dangerous world that is more uncertain’ and one that the UK would need to address alongside other countries.

John Healey Budget warning and the squeeze on fiscal headroom

The backdrop to Healey’s John Healey Budget warning is a fiscal cushion that is already under pressure. Economists have predicted that the headroom Rachel Reeves built into her last Budget, through a combination of tax rises and departmental spending cuts, will be eroded by the inflationary pressures of global turmoil.

If that headroom narrows further, it could limit Prime Minister Andy Burnham’s ambitions on the cost-of-living crisis and restrict spending plans across his wider agenda. Healey declined to tell the Financial Times exactly how much fiscal headroom he intended to maintain above his spending plans after the Budget.

A key fiscal rule requires HM Treasury to bring the Budget into surplus by the end of the Parliament, excluding investment spending. Healey told the newspaper that both he and the Prime Minister were ‘in lockstep in our determination to meet the fiscal rules’, and that the target would be achieved ‘with a buffer against the sort of uncertainty that we have talked about’.

Defence spending and Treasury rule changes

Separately, Healey has come under pressure from the Conservatives for not recommitting to spending 3% of GDP on defence by 2030. When he resigned as Sir Keir Starmer’s defence secretary, Healey had suggested hitting that target was vital to national security. He did tell the Financial Times, however, that the UK would reach its goal of raising defence spending to 3.5% of GDP by 2035, a commitment made to NATO, though he said the detail would be set out at next year’s spending review.

On the domestic economy, the Chancellor announced changes to Treasury rules designed to speed up regional regeneration. The central change involves the Treasury’s ‘green book’, which is its guide to evaluating the costs and benefits of Government projects and programmes. Specifically, the ‘discount rate’, the figure used to assess the long-term value of public spending, will be lowered from 3.5% to 3%.

Reducing that rate makes it easier to demonstrate the long-term value of spending public money on projects such as new schools and roads. The announcement comes ahead of a major speech on the economy Healey is due to give on Monday.