Tax promises, defence targets and Iran: Andy Burnham’s budget headaches

1. Fiscal rules

The biggest risk of Burnham as prime minister was always whether he would spook the bond markets and set in train a Liz Truss-style meltdown.

Starmer’s allies often played up this fear but there is no doubt that Burnham had to ensure that markets knew he was a serious operator. Gilt yields rose after an interview last year in which he said the government was “in hock to the bond markets”.

So, Burnham has committed to Rachel Reeves’s fiscal rules on debt and borrowing, though he has indicated he will “use, obviously, any flexibility within them” where he can borrow to fund further investment.

2. Tax promises

Burnham has said he will “stick to the manifesto”, which promises no increases in income tax, national insurance or VAT, though he cautioned in an interview earlier this week that the public needed to be “realistic” about what needed to be funded and how difficult more spending would be.

That decision to stick to no rises in personal taxation had left businesses fearing a tax raid – and Burnham has been urged by some leftwing and union leaders to consider further wealth taxes. But the prime minister told the FT this week he was loth to do more to increase the costs of doing business and did not want to target “wealth creators”. With each utterance, the possibilities of revenue raisers become ever narrower.

Burnham hinted in the past that he hoped to unfreeze the personal allowance, which would amount to a tax cut, but has recently been more cautious about this because of the costs.

3. Economic turmoil

Reeves left £23.6bn of “headroom” in her last budget, which gives Healey a buffer to meet the fiscal rule of balancing day-to-day spending with receipts.

But the Iran war and subsequent rises in inflation and borrowing costs for servicing Britain’s national debt, which is now almost £3tn, are likely to have an effect on that headroom. Treasury sources say the impact may not be as much as feared, but with the strait of Hormuz remaining closed, growth is sluggish and inflation creeping upwards.

4. Cost of living

Burnham has made a number of popular early interventions to help ease the cost of living. Some, such as cutting VAT on energy bills, are ostensibly funded by cutting existing programmes such as the digital ID scheme, though, as the former minister Darren Jones pointed out, that was never properly costed in the first place.

Healey has suggested there are no further plans to offer energy support at this October price cap, though prices have risen by 4%, wiping out the impact of the VAT cut.

The Treasury will want a contingency plan in place in case more help is needed in January – probably a targeted scheme for more vulnerable households. The Resolution Foundation has suggested that even a targeted scheme for those earning under £25k would cost about £2bn.

5. Defence targets

The Treasury confirmed on Friday that it would delay setting out when the UK would meet the target of spending 3% of GDP on defence, until next year’s spending review.

Burnham would have had to find an additional £4.7bn over five years for defence in October’s budget, after Starmer announced £15bn extra when he published the defence investment plan, without saying where the cash would come from.

The remaining £10.3bn will also have to be raised by “reallocating budget” from across government departments.

Healey resigned as defence secretary in June under Starmer’s leadership, accusing the then prime minister of being “unable” and the Treasury “unwilling” to “commit the resources that the nation needs to defend the country”.

Labour has committed to spending 3.5% of GDP on defence by the middle of the next decade. But there will be endless pressure to go faster, putting more and more of a squeeze on other departmental budgets.

6. Public control

Burnham promised he wanted to place life’s essentials “back under public control” – specifically Thames Water. In June, he told the Guardian he favoured public ownership for Thames Water, which is struggling with a £20bn debt. One possible solution is to use the forthcoming water bill to change the terms of the special administration regime, but it could still end up in costly legal action.

Burnham told the FT recently that he had intentionally spoken in terms of more public control rather than nationalisation, but the budget is his first opportunity to set out a direction of travel that goes beyond local control of bus routes.

7. Welfare

Two big reviews will come back this autumn. One is the second part of the Timms review, which will look at a new system to deliver personal independence payments to disabled people, where the bill is increasing substantially.

The other is the Milburn review of youth unemployment and inactivity, also likely to require significant spending to try to solve the structural crisis that is costing the economy £125bn annually.

Both are highly emotive and fraught with risk, including a potential backlash from Labour MPs.

The Telegraph reported on Thursday that Burnham was likely to push the issue of welfare into the new year at the earliest, and would not be attempting to tackle it in the budget.