Why John Healey’s choices as chancellor will make or break Burnham

0:02Sky News, the full story first.

0:11Paul Kelso:He resigned as Defence Secretary because the Treasury wouldn't show him the money. Now John Healy is Chancellor, facing the exact same problems as Rachel Reeves. This is why.

0:28Paul Kelso:How does a banana trigger a CIA-backed coup? Do AirPods herald the arrival of a new global order? What do LED lights say about the future of humanity? I'm Ed Conway, and in each episode of my new podcast, Stuff Matters, I take an object, crack it open, and reveal the world-shaping forces hidden inside. This is economics told through the things we think we understand. Search Stuff Matters on your podcast app to listen and follow.

1:01Paul Kelso:At this dangerous time, I see the current defence investment plans falling well short of what is required. Our adversaries don't follow timetables set by the Treasury. John Healy there delivering his resignation statement to the Commons last month. He quit as Defence Secretary because the government, very specifically the Treasury under Chancellor Rachel Reeves, wouldn't give him the money he believed the armed forces required. He even went so far as to accuse the Treasury of being a dead hand on dynamic government. Now, in one of Westminster's more delicious reversals, John Healy is the Chancellor.

1:38Paul Kelso:And it's his responsibility to find all the cash required for the extra spending his new boss has been promising. The money can only come from a few places, right? And that is essentially you either borrow more, you tax more, or you collect more by growth. Those are your options. So how powerful is the person who occupies number 11? What can actually be done to sort out the nation's finances? And just how long will it be before we see John Healy under fire at the dispatch box? Paul Kelso is our business correspondent. Paul, let's talk about John Healy. I mean, he did resign as Defence Secretary and he pointed the finger of blame very much in one direction at the Chancellor, you know, then Rachel Reeves.

2:22Paul Kelso:He's now got the job. This is one of those extraordinary moments that crops up in British politics from time to time. Yes, we get used to a world in which we think we know everything before it happens. And absolutely, this one, we did not. In fact, 24 hours before he was appointed, it was written with certainty in some outlets that Shibana Mahmood was going to be the Chancellor. having beaten off competition from Ed Miliband, a man who apparently was going to spook the markets. Yvette Cooper was the safe pair of hands. Well, none of them got the job. And now John Healy has portrayed as exactly that, a safe pair of hands.

2:55But it's irresistible, isn't it, this narrative? The man who probably did more than anyone to finally tip Keir Starmer over the edge by resigning as Defence Secretary, an ultra-loyal minister throughout his time in government on the Labour front bench, made his resignation more powerful. he said the Treasury wasn't willing to fund defence. Well, now who's got the job of doing exactly that? John Healy.

3:15Paul Kelso:What was his problem with Rachel Reeves and the Treasury? Did he genuinely believe that the money existed, it was just that the Treasury was making the wrong choices? The heart of his problem was that he didn't think the Treasury was taking Britain's national security seriously enough, which was what made it such a grave issue and made his statement so powerful. He believes that, frankly, the facts have changed around defence. We have for decades enjoyed the peace dividend with falling threat around the world to the UK. We've spent the money we've saved on warfare or spending it on various kinds of welfare and improving public services.

3:51That has changed because the war in Ukraine and rising insecurity around the world. The UK has committed to increase its defence spending by 2030 to 3 % of GDP. That is a big rise. There's another half a percent to come on top of that. And he thought the Treasury was actually foot dragging over this. Rachel Rees's approach was to try and salami slice other departmental budgets, get other departments to cut a bit of their spending to produce the money that defence needed. It took a very, very long time. It was late in being committed and ultimately only happened after Healy resigned. The deadly quote that he used in his statement was his resignation.

4:33The Treasury is unwilling to commit the resources that the nation needs to defend the country. That's as grave a charge as there is. I think from Rachel Reeves' side and the Treasury side is that, you know, defence spending is something of a bottomless pit. It doesn't have the greatest record on delivering value for money. So there is a dose of scepticism, perhaps even more scepticism about the ask from defence than other departments, and end up in a position where a massive spending commitment, huge for Britain's reputation around the world, simply couldn't be made because the two departments couldn't agree.

5:06Paul Kelso:Do you know what, Paul? I suspect we will be returning to defence more than once over the course of this podcast. But let's start with the first big economic announcement we've actually had from the government. This is all about removing VAT from electricity. Yeah, so Andy Burnham said he wanted to give people breathing space against the cost of living. Well, he started the morning after that speech with what he hopes, I guess, will be a crowd pleaser. So at the moment, you pay 5 % VAT on every unit of electricity you use. That's already reduced from the standard rate. Well, now it's going to go to zero from October.

5:37And that, on average, is going to save about£45,£40,£45 on the average bill, say the Treasury. Look, it's low-hanging fruit, to be honest. It's frankly something that Rachel Reeves could have done at any point and has resisted. And one of the reasons she's resisted it, frankly, it saves more money to those who use more energy, which typically people who have larger houses and can more afford it. So it's not particularly progressive. I mean, low income households spend the greatest share of their income on energy. So it is welcome. But one of the reasons Reid resisted it is because it's a universal benefit.

6:16And she's talked ever since the Iran war began about if there is to be support on energy, it will be targeted. and it will be targeted at those least able to pay. Well, this£850 million or so is going to be spread across every household in the country. It is not targeted. And I think it's very striking that that is a clear change of philosophy when it comes to the biggest cost of living expense of all energy bills between Rachel Reeves and whether John Healy chose this or not, but it's his policy now.

6:47Paul Kelso:Yeah, and as it's his policy, he's going to have to come up with the money for it. And looking at the papers and looking at the morning rounds, we see kind of former ministers popping up. It does appear that there is a bit of a debate in Labour circles about whether or not this is funded. Yeah, so it's£850 million. And in the announcement, it says it will be funded by cancelling the digital ID scheme, which was going to cost£1.8 billion. Well, that seems fair enough, doesn't it? That's not even half of that money. But Darren Jones, a former First Secretary of the Treasury and was Prime Minister Kilis Dahmer's right-hand man, has helpfully pointed out to his former colleagues that that£1.8 billion on digital ID was not fully funded.

7:27That is to say, the money, the actual real money, had not been allocated to it. It was going to come from savings, we've mentioned this already, made by other departments that hadn't yet been finalised. So instead of those savings, which haven't yet been allocated, paying for digital ID, they're now going to pay for this VAT cut. Now, in the scheme of things,£850 million is pretty easily covered, and it's only a few months until the budget when all of this can be nailed away. But I am put in mind of Rachel Reeves' first few weeks as Chancellor, the first weeks of that new government when we were called to a briefing at which she revealed the famous black hole, the£22 billion, of unfunded spending commitments made by the Tories for which real money had not been found.

8:14well this is an example of exactly that accounting process being applied to a spending commitment. So look it's not going to break the bank but it does demonstrate quite neatly in a small example many of the issues that Healy is going to face writ large across this job of making the books balance and trying to deliver the commitments that clearly Andy Burnham would like to make on the public purse.

8:38Paul Kelso:Okay so let's talk about the bigger picture then Paul. in terms simple enough for me to understand. What is the current state of the nation's finances? What are the challenges that immediately present themselves to John Ealy? So it's going to be simple enough for me to understand too. So I think we can try and dumb this down sufficiently that we can get by. Essentially, the Chancellor operates within a framework set by the Office for Budget Responsibility, which marks the Chancellor's homework. The Chancellor sets out tax and spending commitments. the OBR runs them through its own analysis and comes up with a figure that has come to really dominate spending and our politics, which is the amount of headroom against the fiscal rules.

9:20We don't need to spell out the fiscal rules, but essentially they're there to convince the markets that we're not just going to run the credit card up, spend more than we can afford and have to borrow and tax more to fund it. So you have to convince the markets. The OBR says against that, there's some headroom. How much spare is there for unforeseen events? And at the spring statement, the last one delivered by Rachel Reeves, there was about£24 billion of headroom. But of that £24 billion, the outbreak of war in Iran, the impact on energy prices, Resolution Foundation, who provide forecasts, estimate there's about£10 billion left of that headroom.

9:57So£10 billion isn't an enormous amount. It certainly doesn't give the Chancellor the ability to go out on a spending spree without accounting for that money one way or another from somewhere else.

10:07Paul Kelso:And you would expect, given the hissy fit he threw when he walked out of the main building at the Ministry of Defence, that defence spending and a significant increase to it will be one of his priorities. But you've got to balance that against what Andy Burnham is talking about. He wants cost of living support, he wants to deal with council housing, he wants better public services. I mean, can all of those ambitions realistically be met, given the headroom that we have and the current set of fiscal rules. The money can only come from a few places, right? Whatever you do, you have to balance the books.

10:39And that essentially, you either borrow more, you tax more, or you collect more by growth. Those are your options. And defence spending is a kind of fundamental change to those sums, because the kind of defence spending commitment that the UK has made over the next 10 years, talking about£24 billion a year, that's equivalent to 3.5p on income tax. That is an enormous change in the balance of where our spending is going to have to come from. Any commitment to start spending more money has to be balanced by a realistic plan to pay for it.

11:15Paul Kelso:So if more money is to be found from defence, by the time of the budget, we're probably going to be in a situation where John Healy has to make some difficult decisions. He is basically going to have to take it off of another government department, isn't he? One suspects he will end up exactly where Rachel Reeves was when he was sitting on the other side of the table, which is having to make spending cuts elsewhere, and very possibly not just for defence. He's going to start nationalising industries. Well, that costs money too. The one budget that everyone looks at, because spending cuts is the other way you do this if you don't want to go back for more taxes yet again, is the welfare budget and it has grown but it is also true that cutting the welfare budget is incredibly difficult because you have to make tough choices the truth is i don't think i can think of a government that came to power not wanting to cut the welfare budget everybody wants to spend less on welfare because you want your citizenry to be healthy and able to work generating tax revenues and prospering but it's there as a safety net now how secure that net should be i guess how wide that net should be, whether more people should be able to fall through the gaps and stand on their own two feet.

12:22That's what this argument comes down to. And for a Labour government, it's really, really difficult. But then there are plenty. So the clue's in the name. It is a Labour government. It's the party of work. And for now, everything I've heard has been that they want to get more people into work. That's the way you cut the welfare budget, rather than reducing the number of people who are eligible to get the support at the moment. But this is the really big, difficult chewy stuff of grown-up government that now is um is john healy's job and just talking of grown-ups i do think one interesting thing about his biography john healy is 66 years old imagine getting the biggest job of your career almost the biggest job there is age 66 whatever he may or may not do one has to admire the energy to want to take it on and be in a position to do it at a point when he's getting close to retirement although one of the things he might have to do is bump up the retirement age.

13:12I was about to see. To make the books add up. So perhaps he's just going to keep going till 68.

13:22Paul Kelso:How does a banana trigger a CIA-backed coup? Do AirPods herald the arrival of a new global order? What do LED lights say about the future of humanity? I'm Ed Conway, and in each episode of my new podcast, Stuff Matters, I take an object, crack it open and reveal the world-shaping forces hidden inside. This is economics told through the things we think we understand. Search Stuff Matters on your podcast app to listen and follow.

13:59Paul Kelso:Are we, we the journalists, we the British public, are we a bit harsh on our chancellors then? I mean, think about the things that they cannot do. They don't control interest rates. That's the Bank of England. Global energy prices set by the market. The rate at which investors lend to the United Kingdom, again, out of our hands, although based on the policies that he will make. I mean, are chancellors held directly responsible for far too much that goes on in our economy? There is an argument for that. And that brings me back to the number one job to produce stability and a convincing plan that can then withstand the shocks that come your way.

14:38I mean, I don't think anybody blames Rishi Sunak for COVID, but it's about how resilient are you notwithstanding those shocks? And there are things that Rachel Reeves are very interesting. The boss of the biggest bank in the world, Jamie Dimon of J.P. Morgan, has told Sky News that he thought Rachel Reeves did a really good job. And that was her trump card, that at least they knew that the sums would add up. Of course, the charge against her was that having won over the business community in opposition, she burned all that support by hitting them with increasing employers' national insurance, which has held back businesses.

15:15There is no question it has held back business investment. But she did it because she thought the NHS needed more money. And there's the trade-offs because the electorate, ultimately, we still demand those things. We want it every which way, don't we? We want it all. And I do wonder if Chancellor's face demands these days that perhaps are unrealistic. You know, the state, not only did it pay everybody's wages during COVID, that is an enormous amount of debt taken on that ultimately our children are going to have to deal with. it then paid everybody's gas bill in the height of that energy shock.

15:49And those genuinely unprecedented outgoings that we are now, you add all of that on top of bailing out the banks nearly 20 years ago, and little wonder that we worry about repaying debt interest and that the job of Chancellor has got a great deal harder.

16:07Paul Kelso:There is this popular perception that the Treasury sits atop government and stymies good policy simply by refusing to hand over cash. John Healy, arguably, is in that particular number. In about six months' time, he may well find himself in a position inside number 11, looking at the spreadsheets all over the table and discovering that he himself has turned into Rachel Reeves in the same way that every Chancellor has to do at some point during their tenure. Yeah, John Healy talked about the dead hand of Treasury orthodoxy. Well, they're his hands now, but it is the truth. There are demands and the buck stops, literally, at the Treasury, which makes it the biggest job, arguably the most important job, aside from Prime Minister.

16:56One thing we've learned about Andy Burnham, like him or not, he can clearly tell a story. He can clearly articulate what he wants his government to be about, for whose benefit he believes his government should run. And we now have a man who is perhaps shorter on charisma, but very long on experience. It's going to have to make good on his criticism of the Treasury in the past. Britain is in a very, very tricky position fiscally. And maintaining the confidence of markets while demonstrating that we can break the loop, break this, I don't want to call it a doom loop because that overstates it, But we can break out of this cycle and actually start to see some organic growth in the economy, start to feel the positivity that Burnham's trying to spread, actually feel it without constantly turning to the state and saying, this bill's a bit much, can you pay it for us?

17:51Which is exactly where they've started, because frankly, that is a crowd pleaser you can get away with on day one.

17:58Paul Kelso:Paul, as always, many thanks. Cheers. That's a lot for today. But as always, we are looking for your thoughts on today's episode and your suggestions for future ones. Let us know what you think of the choice of John Healy for Chancellor and any of the other cabinet decisions that Andy Burnham has made. Why at Sky.UK is the email. We're back tomorrow.

18:33Paul Kelso:LED lights say about the future of humanity. I'm Ed Conway, and in each episode of my new podcast, Stuff Matters, I take an object, crack it open, and reveal the world-shaping forces hidden inside. This is economics told through the things we think we understand. Search Stuff Matters on your podcast app to listen and follow.