Faisal Islam: Chancellor's attempts to boost vibes may limit tax rises

Faisal Islam: Chancellor's efforts to lift sentiment may constrain tax increases

The chancellor may have considered moving the location of his first major speech this morning.

It was a complete and utter coincidence that he decided to deliver it at the Coventry Manufacturing and Technology Centre (MTC), only a few minutes’ drive from the city’s emblematic HQ of Jaguar Land Rover (JLR).

As it turned out, nobody was holding back. The 4,000 office-based job cuts at JLR were confirmed while John Healey was taking questions a few miles away.

Healey leaned into that as an illustration of the global instability against which the UK needs greater resilience.

What set this chancellor apart from his predecessor was that he also believes emphasising fiscal discipline should build confidence among consumers, businesses and investors, rather than drain it away amid persistent fears of tax rises.

So the prime minister and his chancellor have been carrying out a deliberate effort to improve the economic mood - “a new story”, as he put it.

That was evident in his speech, and again in a BBC interview afterwards. There are some encouraging underlying signals in consumer, business and recruiter confidence measures suggesting the message has landed, although the hot weather and the World Cup have also played a part.

The Downing Street pair are trying to preserve this valuable asset of confidence and encourage the economic animal spirits that have been held back by years of political and economic turmoil.

“Borrowing costs are too high,” Healey admitted at the beginning of his speech. The worldwide rise in bond yields is like a boa constrictor tightening around the Budget arithmetic, slowly and steadily, sometimes easing slightly, but never truly disappearing.

That naturally raises sensible questions about how to reduce borrowing while also protecting the modest improvement in confidence.

To me, the speech did not appear to lay the groundwork - a “pitch roll” - for major tax rises, as I heard in the equivalent Budget “scene setters” over the past two years.

“Am I right?” I asked the chancellor on this point. He paused, searching for exactly the right wording. “I won’t comment. I can’t comment. No chancellor can ahead of a Budget I will take and announce on October 28th”.

All right, then what about the advice from one of the PM’s favourite economists, Lord O’Neill, that higher borrowing rates are a golden chance to abolish the triple lock?

The triple lock guarantees the state pension rises each year in line with inflation, wage growth or 2.5% - whichever is highest - but some argue it is unaffordable.

“The prime minister has said, like I have, that we must bring down welfare costs, but we are also responding to the extreme pressure that is there in wider markets,” Healey said.

Neither reply was a denial, but neither was it any kind of confirmation. Like a stubborn batsman, the chancellor is going to remain at the crease, revealing very little, in his case, about next month’s Budget.

There was a strong emphasis on growth. While touring the MTC, a centre of excellence for advanced manufacturing, he said the UK’s “great talent and latent potential” made it the third most innovative country in the world, and he wanted to turn that into economic growth and success in more areas.

Two decades ago, Healey was in charge of the Regional Development Agencies, later scrapped by the Coalition Government, which helped finance this very facility.

In his speech there was a major clue about how to reconcile investment in industrial policy with difficult public finances.

The “Pufins” - public finance institutions - such as the British Business Bank and National Wealth Fund can invest strategically, with fewer constraints from the government’s borrowing rules. Part of the plan is for Pufins to produce more unicorns ($1bn tech startups) in the UK.

This is the other side of the global backdrop. Amid the upheaval of trade and military conflicts, there is arguably one of the biggest financial events in world history.

In the coming weeks, hundreds of billions of dollars will be invested and trillions in value confirmed from flotations of major American AI firms. The UK has some standout technology in this area. The government wants to encourage it.

However, the chancellor was also cautious about AI’s effects on security and jobs. Some level of “public control” may be needed to make these changes work for everyone. That seemed a little less enthusiastic than the Starmer administration’s position.

The chancellor may also have had in mind the army of manufacturing robots, laser welders and 3D metal printers whirring into action around him.

In the long run, he said, growth will determine whether his borrowing rules are met.

In the end, he will be judged by the policies he actually chooses, but where there are trade-offs between balancing the books and economic growth across the country, this sounds like a chancellor who may well put the latter first.