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Traders across the City held their breath on Monday evening when Ed Miliband and Shabana Mahmood walked together into Downing Street.
Expectations were high that either could become chancellor, and set the tone for Andy Burnham’s plans for Government.
Yet neither prevailed. In a surprise twist to Burnham’s reshuffle, John Healey, the former defence secretary, was handed control of the national finances.
But despite the bond markets’ sigh of relief, prudent plans for Britain’s finances are far from assured with the Chancellor in charge.
On Tuesday, Healey said the new Government would “meet the fiscal rules”, and that fiscal credibility was the “bedrock of economic stability and national security”.
Yet that’s a change of tune from his previous views on tax.
In the past, he has backed the 50pc top rate of income tax, campaigned for higher benefit spending and been a leading member of Jeremy Corbyn’s far-Left shadow cabinet.
Instead of being the guarantor of sensible financial management, Healey’s chameleon-like adoption of fiscal policies poses questions about his management of the public purse.
A Westminster veteran, Healey has risen to the helm of the Treasury the hard way.
An MP since 1997, the former trade union campaigner was a junior minister under Tony Blair and Gordon Brown before finally entering the Cabinet as Sir Keir Starmer’s Defence Secretary in 2024.
During his first stint in Government, Healey served as private secretary to Brown and spent half a decade in junior ministerial roles in the Treasury between 2002 and 2007.
This was a different age, when “prudence” was the watchword and the national debt was around 34pc of GDP, compared with nearly 95pc today.
The prior experience serving under Blair and Brown – two market-friendly Labour leaders – has given Healey the aura of a man who will take the financial markets seriously, a reliable bet to handle Britain’s high debts.
He is a “safe pair of hands in Treasury” and someone “not afraid to reform or be radical”, says Theo Bertram, a former adviser to Tony Blair and Gordon Brown.
Healey’s welfare stance
But in other policy areas, his past positions mean he does not seem such a sound choice to fix Britain’s crumbling finances.
With benefits at record highs and the tax burden heading for its highest since the Second World War, Britain has a Chancellor who has long campaigned for the 50pc top rate of tax, higher Capital Gains Tax (CGT) and more generous welfare.
Mahmood, the Home Secretary, was considered a favoured potential chancellor by the Right-wing of Labour – and potentially by bond markets – in part because she refused to serve under Jeremy Corbyn.
She quit the shadow cabinet when the hard-line Left-winger became leader of the Opposition in 2015, rejecting his economic policies.
Healey showed no such qualms.
He sat on the green benches alongside Corbyn and John McDonnell, the shadow chancellor at the time, during their doomed tenure leading Labour, acting as shadow housing secretary from 2016 to 2020.
And if Burnham is serious about bringing spending under control, particularly the welfare bill, he may have chosen the wrong man: Healey spent much of the 2010s railing against benefit cuts.
In 2016, he denounced “a starkly regressive Budget, with the rich getting the most and the poor getting the least”.
“We saw a tycoon tax cut of over £3bn benefiting the very richest, an income tax cut of £2bn benefiting the better-off, and, alongside that, a cut in disability benefits worth over £4bn,” he said.
Those were references to a reduction in Capital Gains Tax and higher income tax thresholds, helping both low and higher-income workers.
Healey had been complaining for years after the Conservative-Liberal Democrat coalition cut Gordon Brown’s 50pc top rate of income tax to 45pc, after the levy raised less money than anticipated.
In 2012, he said: “The chancellor this afternoon singled out for special treatment those earning more than £150,000 a year, cutting their 50p income tax rate and giving them a tax break that is worth more to those people than many in Rotherham or Barnsley can earn in a year.”
Now Healey has the power to write the next Budget, he is in a position to ramp up those taxes on higher earners and on investors, just as the Government – yet again – needs to find more cash.
If Healey sticks to his guns, Burnham will face a tough choice: Labour has promised not to increase income tax, National Insurance contributions (NICs), VAT or corporation tax.
Getting around that could require semantic jiggery-pokery, such as when Rachel Reeves, the former chancellor, raised the NICs paid by employers and claimed it did not break Labour’s manifesto pledge.
Another favoured tool is the stealth tax of freezing or cutting thresholds, though Burnham has indicated he believes that policy has already gone far enough.
Wealth taxes – such as the CGT, which Healey believes should never have been cut – could rise. He complained in 2017 of “tax cuts ... for the richest on wealth that they do not even earn”.
Whatever can be said about Healey, one thing most agree on is that he is a hawk on national security and backs significantly higher spending on defence.
Just two years after joining Sir Keir’s cabinet, he took a dramatic gamble, resigning from the cherished post in protest at what he saw as inadequate spending plans.
His resignation letter to the then-prime minister argued that “you have been unable, and the Treasury has been unwilling, to commit the resources that the nation needs to defend the country at this time of rising threats”.
In a later interview, he said the Government was blighted by “a Treasury orthodoxy that’s a dead hand on dynamic government”.
The resignation piled pressure on an already-embattled Sir Keir. He finally quit when, a week after Healey went, Burnham won the Makerfield by-election.
‘He was strong on defence’
At the Treasury, defence executives hope Healey will take a more constructive approach than his predecessor to military spending.
An industry source argued Reeves had been too fixated on money and lost sight of the ways underfunding the Armed Forces has weakened Britain on the international stage.
They added: “Healey understands the third-order effects of not investing in defence and deterrence.”
One defence start-up boss said: “He was strong on defence, and my sense is he’ll be good as Chancellor.
“Where he’ll be most strong, I think, is understanding how defence impacts industrial and economic progress. The Treasury always has a relatively negative or pessimistic view on the growth multiplier for defence spending, so maybe they’ll have to change their forecasts on that.”
Another defence executive said: “We’re delighted. He was fantastic to deal with as defence secretary. When there was something to be set up, he always followed through.”
Investors seem to agree. Shares in defence giant Babcock were among the biggest risers in the FTSE 100, with BAE Systems and Rolls-Royce also up.
When serving as defence secretary, Healey largely kept to his own brief, focusing on matters military even as turmoil swirled through the rest of Whitehall.
Now he holds the purse strings, almost every other problem in Government comes through his door.
The national debt is about to hit £3tn. Borrowing costs are rising, growth is slowing.
Burnham is already reeling off expensive plans, from cutting VAT on electricity bills to ending homelessness. Unions are poised to threaten more strikes to squeeze ever-higher pay rises from the Government. An expensive nationalisation programme looms.
All the while benefits rise higher, and costs from pensions and the NHS rise without end.
But it can be tough to force these taxes high enough to rake in the sort of revenue the Government needs without driving investors to flee the nation.
That leaves debt.
Burnham has hinted at ways he could use “flexibility” in the borrowing rules to spend more money.
Under Reeves’s iteration of the rules, that typically requires spending on things which can be classed as financial assets, such as shares or bonds of private companies, resulting in a rather limited menu of projects.
So-called “war bonds” are also under consideration, though the nation is not at war, and debt with a new label is still debt.
Healey might be a “safe pair of hands” when it comes to following his boss’s orders, but he still has to face the reality that Britain is a nation with £3tn of debt and few easy answers.
