Markets Brace for a Careful Healey Budget as Mayors Gain Borrowing Power

John Healey's first Budget is being written for the bond market as much as for the dispatch box. When he rises on Wednesday he is expected to offer households some help with another rise in energy bills, and to give businesses what he has called breathing space from higher costs. He is not expected to reopen the era of large tax-and-spend packages associated with his predecessor, Rachel Reeves.

That is the reading in the City this morning, after a weekend in which the Treasury trailed a devolution package and overnight briefings settled the one measure pensioners had been waiting for: a new allowance so the rising state pension does not drag low-income retirees into income tax. The rest of the statement, investors have been told, will be careful.

What the gilt market wants to hear

Britain's public debt passed 3 trillion pounds in September. The cost of servicing it has risen with bond yields around the world, pushed up by the US-Israeli war on Iran and the inflation that followed. The 30-year gilt yield has been quoted near 6 per cent, a level last seen in the late 1990s. The Bank of England has held Bank Rate at 3.75 per cent, with the next Monetary Policy Committee decision due on 5 November.

Bryn Jones, head of fixed income at Rathbones, told Reuters that a decision to spend more than the Treasury takes in "would be what the market doesn't want to hear" in a fiscally tight year. Alexander Harvey, UK economist at Oxford Economics, described the statement as likely to be "largely a stopgap" before a fuller policy overhaul in 2027, by which time the conflict in the Gulf may have eased and a UK-EU summit in November may have improved the outlook for trade.

Andy Burnham's larger ambitions, including a step-up in public housebuilding, defence spending of 3 per cent of national output, and a greater state role in public services, are expected to wait. So is a decision on whether departments should be fully compensated for higher inflation. Healey, who left the defence brief in a funding row while Keir Starmer was still prime minister, may still try to cover a near-term gap in armed forces plans. The big reset is being parked for the spending review.

The bank levy is still the tax rise

The measure the Treasury is most likely to use to raise money is an increase in the levy on bank profits. UK Finance has already warned that restoring the surcharge to 8 per cent could forgo about 20 billion pounds of economic output over a decade by squeezing lending and investment. Healey has been drawing up the rise as a way to fund cost-of-living support. Whether he goes as far as the lobby fears is the question traders will listen for on Wednesday.

The Treasury has already banked more than 20 billion pounds of extra support for investment in artificial intelligence, defence and green energy over roughly five years, and about 600 million pounds to defend against health and security threats from AI. Those are commitments, not new rabbits. Healey has also ruled out a rise in capital gains tax, after being told it could lose revenue if investors left.

Mayors, and the end of cap in hand

The growth measure with a price tag attached is devolution. The Guardian reported on Saturday that the Budget will include a new 1.5 billion pound borrowing facility, drawn up with England's mayors over the next two years. Regional leaders have long complained that they cannot match cities in the United States and parts of Europe that issue their own bonds.

The facility will not, on its own, transform regional growth. It does tell the market something about the shape of this government: Burnham's politics of place, funded inside a statement that refuses to spook gilts. For the household numbers that will lead the news on Wednesday morning, read how the state pension rise is being kept out of the tax net. For the backdrop of prices and debt, our countdown from last week still holds.