Healy makes first move as Chancellor, but bond market not impressed

John Healy was Andy Burnham’s surprise pick as Chancellor. He’s got straight to work and has already announced a VAT cut to electricity bills from October 1^st. The cut will last until April 27. VAT is charged at 5% for electricity bills, and scrapping this tax will bring bills down by approx. £50 per household. The move is estimated to reduce CPI by 0.1%, and is expected to cost £850mn, funded by Burnham’s announcement that he would scrap Starmer’s digital ID scheme.

Burnham chooses tax cut as first move as PM, but is it really funded?

Healy is out of the blocks early, but he is already facing criticism, from a former Labour minister. Although the new chancellor says that the cut to VAT on electricity bills is fully funded, Darren Jones has said that this is not quite true. The OBR said last year that there was no money set aside for the digital ID scheme, and instead the money was expected to come from cuts across other departments.

Bonds yields are rising again today. The 10-year yield is higher at the open, and the 2-year yield is also rising, the 10-year yield remains firmly above 5%. This comes even though the VAT cut to energy bills could take a notch off the UK’s CPI rate.  UK yields have risen more than elsewhere this week, and in the past month, yields are higher by nearly 20bps. The market is obviously not impressed by Burnham and Healy, and they could find that they have an uphill battle to convince the public and the bond market that they are serious about the economy and sticking to the fiscal rules.  The pound is rising today as the dollar retreats, although it remains lower over the last 5 days.

We are expecting a torrent of economic announcements this morning, as the new PM rushes through more help to ease cost of living pressures. Other measures he may announce today include scrapping some green levies on household bills, which could save households another £50.

While the sums saved by households are small, the principle matters. Could Burnham’s shift to the left rhetoric, be all talk and no action? Today’s move could be designed to reassure financial markets that the Labour Party doesn’t have to tax everything that moves. However, this is a drop in the ocean, energy bills are still expected to rise this autumn, so Healy and Burnham have a long way to go.

The buses obsession continues

Other announcements that may come today could include a reduction in the cap on bus fares, as Burnham’s obsession  with buses continues. There has also been pushback on a potential bank levy from Jaime Dimon, the CEO of JP Morgan. He said that there would be consequences if Burnham taxes the banks, one assumes this would mean the cancellation of JP Morgan’s planned new HQ In London.

Stable labour market data in boost to Burnham

Burnham and Healy will also have to digest the latest labour market data from the UK. Overall, the data was not as bad as feared. The unemployment rate stayed at 4.9%, and the latest data shows a relatively ‘steady labour market picture overall’, according to the ONS. The number of employees on the payroll was mostly flat, and employment and inactivity rates were also broadly similar in the last quarter.

There was a small bit of good news in this report, payrolled workers were revised up for May and grew by 3,000 people in May vs. April. However, payrolled employment fell in June, vacancies fell last quarter, but at a slower pace than before, and there are still signs that small businesses are struggling under the weight of hiring costs.

Government borrowing won’t offer Healy much comfort

The public sector finance data was also released today, a timely release considering the 7bp jump in the UK’s 10-year Gilt yield that pushed the interest rate above 5% on Monday. Borrowing was £16bn last month, down nearly £8bn compared to a year ago, this was largely due to a decline in interest rate repayments and higher tax receipts. The government had to pay £11.8bn in debt interest last month, down £5.3bn compared to a year ago.

This ‘good news’ from the public sector finances won’t offer much comfort to the new chancellor. June 2026 borrowing was still the fourth highest for June on record. Borrowing this fiscal year is currently £57.6bn, £2.7bn above the OBR’s forecast. This is 1.9% of GDP, which is the 10^th highest April to June period since records began in 1993.

UK debt to GDP at uncomfortable levels

Today’s data highlights the strained UK public finances. Debt to GDP at the end of June was 94.9%, up 0.4% in a year. This is the highest level since the early 1960s, when the UK was rebuilt after the Second World War. Using the more flattering Public Sector Net Financial Liabilities measure, net debt was 84.5% of GDP, up 1.8% in a year.

Borrowing data show that tax rises are not a realistic policy proposal

Added to this, after the recent run up in UK borrowing costs, caused by the escalating conflict in the Middle East and another leg higher in the UK’s political risk premium, interest payments are likely to rise again as soon as this month. The fact that tax receipts are rising but borrowing is still near record-breaking levels, should also be a wake-up call to Burnham and Healy. The UK can’t just tax its way out of financial trouble. There is no room to increase the top rate of tax, and Burnham knows this. The biggest 10% of all taxpayers already pay 60% of all tax, there shoulders cannot carry more.

Limited flexibility in the UK’s fiscal rules

Burnham also spoke about flexibility within the fiscal rules on his first day as PM. Today’s data suggests Burnham’s vision has already met harsh economic reality as the UK’s debt to GDP ratio pushes towards 100%, there may not be much flexibility left. We will need to wait and see if Healy talks in the same way as Burnham, and if he can soften Burnham’s flexibility and high spend message to calm financial markets and taxpayers who could lose confidence if they expect further tax rises this autumn.

Will Healy bring Burnham back to New Labour economic values?

At this stage, we believe that spending cuts are necessary to reduce the political risk premium built into UK debt in recent weeks. However, not much is known about John Healy, and the public and the market will need to hear more from him soon to understand if he is supportive of a lurch to the left regarding economic policy. Healy is a seasoned politician and has decades of experience. He held positions in the Treasury under Tony Blair and Gordon Brown, some may wonder if his appointment is a nod to Blair who was critical of Starmer’s economic policy. Thus, Burnham’s surprise pick as chancellor could be a sign that Burnham is more New Labour in mind, even if the Old Labour of the 1970sin heart.

Oil prices fall in boost to market mood

Elsewhere, Ed Miliband has his work cut out for him today after the Ministry of Defense said that Russia tested its missile capability  off the UK coast. There is also some relief in financial markets as the oil price has fallen back below the $90 per barrel level for Brent crude. Stock futures are higher, and the Nasdaq is expected to rise more than 1% on Tuesday, as we lead up to some key earnings releases this week including Tesla and Alphabet.

Chip stocks make a comeback

South Korea’s Kospi index also jumped more than 3.5% today, in a sign that chip stocks could be making a comeback. SK Hynix and Samsung, two of the world’s largest chip makers, jumped 4.7% and 6.5% respectively on Tuesday, and chip bulls will hope that sentiment spreads to the US later today. Markets are more subdued in Europe. The FTSE 100 is expected to open lower, as the oil price decline and the improvement in market sentiment dents enthusiasm for its defensive characteristics. The Eurostoxx index is expected to open mildly lower.

Chart 1: Nasdaq 100 in a holding pattern ahead of earnings, chip stocks

Source: XTB