‘The chancellor is in a bind’: is No 11 at odds with Burnham’s big vision?

Until now, Andy Burnham has been a lucky prime minister. In office for just over six weeks, no major domestic crisis derailed his plans over the summer, Reform has been on the back foot, and he arrived back at Westminster with his personal approval ratings soaring and optimism undampened.

But underneath the sense of relief that many Labour MPs are feeling that their high-stakes gamble of ousting Keir Starmer appears – for now – to have paid off, there is an unease that Burnham’s premiership is yet to make contact with economic reality.

In their early weeks in office, his team were able to point to some inherited green shoots: below-forecast inflation figures, sustained growth, signs that sluggish productivity could be starting to turn around. All despite the economic turmoil unleashed by the Iran conflict.

This week, all that changed. With the end of summer recess came a global bond sell-off amid anxiety over oil prices, sticky inflation and pressure to ramp up defence spending, which pushed government borrowing costs to their highest since the 2008 financial crash.

It makes the backdrop to John Healey’s first budget as chancellor a difficult one. Economists reckon about half of the £24bn fiscal breathing space his predecessor Rachel Reeves had built up at her spring forecast has since been wiped out by higher inflation and interest rates, severely limiting Healey’s room for manoeuvre.

Among the more experienced hands in government, there is a firm view that the new administration cannot return to the days of slim headroom given Reeves’s experience last year, which led to more brutal proposed welfare cuts and ultimately a backbench rebellion last summer.

Healey has just returned from the G20 finance ministers’ meeting in North Carolina and is acutely conscious of factors beyond his control that will hit the Office for Budget Responsibility’s forecasts, including the rising cost of oil after bombing resumed in Iran.

It is little surprise, then, that he has repeatedly stressed that fiscal responsibility is the “bedrock” of his approach and he will stick to Reeves’s fiscal rules.

But his cautious tone jars uncomfortably with the prime minister’s large – and costly – policy vision: more public control of utilities, reform of the broken social care system and a mass social home building programme.

“[Healey] is in a bind,” one Treasury source said. “His instinct is to keep things steady, especially while the OBR does its snapshot, but that’s not Andy’s gameplan for his first week back.”

Indeed, Downing Street has been eager to ensure Burnham’s vision stays front and centre. In a mammoth three-and-a-half-hour Commons session on Tuesday, he repeatedly promised to deliver the “much more substantial change” the country was crying out for.

Among Burnham’s closest allies, there have been some mutterings that Healey could, like chancellors before him, be in danger of being “captured” by the Treasury and its more orthodox arguments. “John did not exactly show in the Ministry of Defence that he was good at questioning internal departmental wisdom and pressures,” one government aide said.

The friction between the two operations burst into the open last week when Healey suggested in a television interview that Burnham was running a “continuity” government.

No 10 insiders pushed back hard. “Nobody listening to Andy and his plans for growth could think he is just about continuity,” said one senior figure. “He’s going to change things.”

A timely report that suggests Manchester’s economic success – one of Burnham’s biggest legacies – could be replicated across England to unlock untapped growth potential of up to £80bn is released this weekend.

Mandala Partners, a global economic research consultancy that was led by Nick Williams – a former Downing Street economic adviser who is now working for the first secretary, Louise Haigh – found that housing, transport and health devolution would be crucial to achieving the prime minister’s aim of “growth in every postcode”.

Of these, the impact of following Manchester’s housing investment model is most striking. The report found that an £8.5bn programme of revolving public risk capital across mayoral strategic authorities could unlock almost 100,000 additional homes, crowd in more than £20bn of private investment and support more than 70,000 jobs.

While not commissioned by No 10, Mandala’s study nevertheless bolsters Burnham’s central growth argument that learning from the success of Manchester’s devolution model could deliver far-reaching economic benefits and release the country from its low-growth chokehold.

The chancellor has privately acknowledged there is room for modest additional borrowing to fund investment given Reeves’s rule change in 2024, which allowed the Treasury to offset financial assets against government debt.

However, there is little sense of a radical new perspective emerging from the new regime at No 11. On Monday, Healey will give a speech on the government’s mission for growth, which is expected to stress the importance of devolution and public investment – both themes Reeves repeatedly returned to.

The chancellor will emphasise the need to give the private sector the confidence to invest – raising doubts about whether he is likely to go ahead with one of the big revenue raisers that progressive economists and the TUC have called for: a windfall tax on banks.

Treasury sources have declined to say whether Healey will stick to Reeves’s intention of holding only one major “fiscal event” each year, with the spring forecast a much more low-key affair. That would leave open the possibility of using his 28 October statement to fund the gaps in the defence investment plan and make more progress on tax devolution, while leaving the weightier tax and spending decisions until the spring.

Labour MPs are anxious for change as quickly as the government can deliver it. They applaud Burnham’s ambition and the sense of hope he fosters but worry that the economic realities will drag him down.

Tan Dhesi, the Labour chair of the Commons defence committee, summed up the mood when he suggested at PMQs that “vibes alone just will not be enough”. While he was referring to military spending, the sentiment is shared across the backbenches.

Burnham has repeatedly said he will be relentless in fulfilling his priorities. But some of his MPs are already worried that his promise to repair the crumbling state and offer “breathing space” on the cost of living could be hard to reconcile with promises of fiscal responsibility.

Downing Street sources argue, however, that it is only by improving infrastructure and devolving power that the British economy can grow as fast as Manchester’s. They cite Burnham’s visit to Cornwall this summer, where businesses told him it was taking them a year to connect to the grid.

Healey’s economic instincts are less clear. When asked what would be the main difference between him and his instinctively prudent predecessor, one adviser said: “To be honest, I think he will actually be more cautious.”

Despite his apparent wariness, government aides insist the chancellor is fully onboard with Burnham’s vision. One said: “There will always be tensions between the different parts of government, but John is aligned with Andy’s agenda. And he knows who is boss.”