John Healey has been appointed chancellor by prime minister Andy Burnham, a move that came as a surprise to markets, which had tipped Shabana Mahmood as the frontrunner for the role with Ed Miliband a distant second choice.
Healey, a former Treasury minister under Gordon Brown, becomes the UK's sixth chancellor in just over four years and was described by Oliver Faizallah, head of fixed income research at Raymond James as a "surprise pick".
“Going into the announcement, Mahmood appeared the near-certain choice, with Miliband viewed as a possibility but an outlier.”
Healey resigned as defence secretary earlier this year after the government failed to set out a roadmap for meeting NATO's target of defence spending reaching 3% of GDP by 2030. He now takes charge of a fiscal rule that requires debt to fall as a share of the economy by the end of the Parliament, leaving him to reconcile his own record of pushing for higher military spending with the constraints of the job he has just taken on.
Dan Coatsworth, head of markets at AJ Bell, said the market has read the appointment as a vote for continuity on defence.
“UK defence stocks motored higher on Healey's appointment, given his previous role in pushing Keir Starmer to agree to higher defence spending,” he said. “The market is taking the view that defence is close to Healey's heart, and he will drive through increased funding under his new role as chancellor.”
Shares in BAE Systems, Rolls-Royce, QinetiQ and Melrose all rise in early trade.
Susannah Streeter, chief investment strategist at Wealth Club, said the armed forces are likely to welcome the appointment for similar reasons. Having spent months making the case for higher military spending, Healey has a detailed understanding of the capability gaps facing the armed forces and may be more willing than his predecessor to set out a credible pathway to the 3% target, she said.
The bond market's initial reaction was more cautious. Gilt yields jumped yesterday afternoon after Burnham suggested there was some flexibility within the government's fiscal rules, before easing back once he clarified he would take no risks with the economy.
That leaves Healey with limited room to manoeuvre on tax, according to Coatsworth, particularly after Burnham used his first full day in office to confirm VAT on household electricity bills will be scrapped from October, a move funded by the cancellation of the digital ID programme.
Coatsworth called it “a quick win for the new team” – though, as he noted, the harder tax questions facing Healey are still to come.
“Healey knows bond markets won't allow him to make other tax cuts without saying how they'll be paid for,” he said. “Bond markets take no prisoners and they will be quick to protest if government policies are viewed as irresponsible.”
The fiscal picture he inherits already has a stealth tax problem attached to it.
Income tax receipts in June were almost 13% higher than the same month a year earlier, and 58% higher than in June 2021, according to Sarah Coles, head of personal finance at AJ Bell. The number of taxpayers has grown to 40.8 million, she said, and the average taxpayer now hands over £8,510 this tax year, up from £7,470 three years ago.
Burnham has floated revisiting the frozen personal allowance, but HMRC estimates every £100 increase costs around £1 billion, meaning a rise in line with inflation since the freeze could cost in the region of £35 billion.
“It's a difficult ask from Healey as he steps through the door to Number 11 and he might not want to gain an early reputation as a tax-hiking chancellor,” Coles said.
Shaun Moore, tax and financial planning expert at Quilter, noted how frequent turnover at the Treasury makes it harder to pursue a consistent long-term strategy and how repeated speculation of the kind seen before recent Budgets over pension tax-free cash can discourage long-term saving and investing, regardless of what is ultimately decided.