UK Chancellor Healey Faces Tough Balancing Act in First Budget Under PM Burnham

British Treasury chief John Healey is set to deliver his first budget statement on Wednesday, facing a delicate balancing act as the economic fallout from the Iran war complicates his task. He will address the House of Commons in what is widely seen as the main set-piece event in Parliament's calendar.

Healey became Chancellor of the Exchequer in July, when Andy Burnham took over as prime minister. Although the British economy has proved more resilient than expected this year and has grown strongly, the money is not there to fund many of the Labour government's ambitions for restoring public services.

Like other countries, the U.K. has been hit by inflation linked to the Iran war and the resulting bottlenecks in the Strait of Hormuz, which have tightened global oil and gas supplies. U.K. inflation has climbed to 3.5%, a near one-year high, as fuel prices keep rising, and it is forecast to go higher in the coming months. The Bank of England is expected to raise interest rates soon, which would add to the government's cost of servicing its debt.

Against that backdrop, the budget is expected to be relatively low-key, particularly as bond markets worry about debt levels around the world. France has recently drawn attention after a wave of protests exposed the fragile state of its finances.

Matthew Amis, an investment director at Aberdeen Investments, said a "dull budget" could be rewarded by financial markets with lower government borrowing costs. In the longer run, that could free up resources for schools, hospitals and the military. He added a warning: "The one note of caution is that international investors are very quick to punish countries with a weak fiscal story. Just ask France."

In his limited comments before the statement, Healey said he wants to give businesses and families "some breathing space" from the rising cost of living. That could include steps to soften the impact of higher energy prices. Burnham has also made pledges to reduce and even eradicate homelessness, improve care for the elderly and meet NATO defense spending targets.

On the revenue side, banks, which have gained from higher interest rates, are expected to face a higher surcharge on their profits. Higher taxes on the gambling sector may also be on the table.

The central problem is the same one that faced his predecessor Rachel Reeves, who became Chancellor after Labour returned to power in a landslide election win: the country's debt. The International Monetary Fund recently gave a nod of approval to the trajectory of the public finances. Even so, U.K. debt has passed 3 trillion pounds ($4 trillion) for the first time, and servicing it takes 8% of government spending.

Defense will draw particular attention. Healey quit as defense secretary earlier this year in protest at the lack of funding, a move that added pressure on Burnham's predecessor, Keir Starmer. Paying for more defense spending would mean finding money elsewhere, through tax rises or spending cuts, if he is to keep nervous bond market investors at bay.