Chancellor John Healey says growth will provide the "pathway out of indebtedness and into prosperity". But the path he must tread is a difficult one, writes Mauricio Alencar.

When it was announced that John Healey would be delivering a speech in Coventry, it was widely assumed he would visit Jaguar Land Rover's headquarters, with cars and machines providing an apt backdrop for the cameras. Previous chancellors such as George Osborne and Rachel Reeves chose JLR sites to deliver flagship speeches in the past.

Instead, Healey appeared down the road at the Manufacturing Technology Centre. At the same time, JLR chiefs were preparing to tell some 4,000 workers they were at risk of redundancy.

The car manufacturing giant, owned by India's Tata Motors, has endured a brutal 12 months dealing with the fallout of a cyber attack. From the perspective of both the public and the government, however, the problems are symbolic. Manufacturing has long been flagged by policymakers as central to rebalancing the UK economy away from its reliance on services, which makes the jobs news at one of Britain's largest industrial employers all the more pointed. Treasury and Department for Business staff will be more worried about what the job cuts mean for "good growth" and Andy Burnham's stated ambition to "partner" with the private sector.

The formal announcement spoiled Healey's desire to seize the narrative on the UK "turning a corner". Indeed, JLR's news may have reminded investors and prospective workers that the economy has not yet taken the right turn.

Can Healey avoid negativity?

Burnham and Healey have signalled their wish to "do things differently" from their predecessors Sir Keir Starmer and Rachel Reeves. Shortly after entering government, ministers complained about their fiscal inheritance – the so-called £22bn black hole – as a ploy to justify some benefit cuts and higher taxes.

On the surface, Healey's speech on Monday showed his willingness to be more optimistic. He said the UK had "latent potential" and "huge resilience", and that there were "relative strengths in dealing with the fiscal challenges".

Sprinkled between the optimistic statements, though, were rather more negative reflections on the state of the UK economy. He is "deeply concerned" about the cost of living and business. Economic growth is "fragile", and the country is "scarred" by youth unemployment. The government had plans to lift spirits but could "not deliver all this tomorrow".

Opposition figures have already attacked Healey for offering no news of substance. Reform UK's Robert Jenrick called the speech "dreary", while the Conservatives' Andrew Griffith said "warm words" would not make growth "a reality".

Both opposition parties have said they would cut welfare spending to fund tax cuts. Healey and Burnham have spoken about their ambition to bring the welfare bill down without delivering "crude cuts". Neither, however, has linked the size of spending on disability or pensions to potential tax cuts.

Healey may feel he cannot afford to make such promises. After a heavy Labour backbench rebellion, an embarrassing U-turn by Starmer and Reeves on £5bn welfare cuts led to the launch of government reviews lasting more than a year. Proposals laid out by minister Sir Stephen Timms on personal independence payments (Pips), along with the completion of a separate review by Alan Milburn on youth unemployment, could give the government some cover to introduce cuts – although neither report is due until after the Budget.

That timing stops Healey from being able to target the £322bn welfare budget – most of which is made up of pensioner spending – for cuts. If he genuinely wanted to cut taxes by substantial amounts to offer people real "breathing space" on the cost of living, he would have to roll back the public spending boosts previously announced by Reeves.

Headroom halved and the tax rises expected

Even then, business chiefs, government officials and voters understand that tax cuts are highly unlikely this year. Thomas Pugh, economist at the accountancy firm RSM, said on Monday that the Chancellor has far less breathing room than Reeves had when the Spring Statement was delivered in early March this year.

He calculated the fiscal buffer available – based on borrowing targets wholly dependent on judgements made by the Office for Budget Responsibility, the independent watchdog set up in 2010 to certify the government's fiscal plans – at £11.5bn, down from £23.6bn. The erosion has come as gilt yields spiked amid global bond market turmoil, pushing up government borrowing costs. The government is projected to spend more than £116bn in debt interest this year, rising to about £137bn in 2030 – more than the education budget, the second-largest government department. It is a measure of how far debt interest has climbed up the spending league table: servicing debt now rivals entire departmental budgets, leaving less room for the growth-enhancing investment Healey wants to champion.

The timing of the rout in bond markets is particularly damaging for Healey, Pugh said, because the snapshot period the OBR uses for its fiscal forecasts is likely to come around mid-September. That could add significantly higher cost projections to its forecasts than if the OBR had used data from June, when yields were slightly lower.

Lower migration and higher inflation projections could also further cost Healey this year, according to Pugh. The City economist added that this level of headroom would still be above what Reeves twice had, meaning the Treasury can "probably live" with a buffer above £10bn.

But a rise in bond yields and poorer forecasts "does leave the Chancellor in a precarious position", Pugh added.

"The reason Reeves decided to more than double the headroom was because such a narrow buffer created endless speculation about what taxes would have to go up every time there was a change in gilt yields. That speculation was bad for growth."

Like their predecessors, the best Healey and Burnham could hope for is for President Trump to find a way to open up the Strait of Hormuz for the foreseeable future. Oil and gas prices would likely fall as firms expect trade flows to resume, triggering a sequence of events that favours the UK: inflation expectations would likely fall back, interest rate hike expectations would ease, bond yields would drop, and the government would see more room for manoeuvre in public finances.

But there is an alternative for the Chancellor. He said in his speech that growth was the "sustainable pathway out of indebtedness and into prosperity". Beyond greater devolution and some planning reforms, it is not clear what Healey's growth vision is, or how quickly he plans to deliver it. Andy Haldane, the former Bank of England chief economist who advised Burnham, and Rishi Sunak are among those saying the Chancellor should rule out tax hikes to allow businesses to proceed with planned investments and for households to spend more without fearing a drop in income.

Tax reform, improving trade and an overhaul of public sector performance may be within the scope of measures Healey could take to lift growth, however politically unpalatable some changes may be. Yet in his speech on Monday there was no mention of the word "radical". In a recent interview, he suggested he would provide "continuity" from the last government. Researchers at Capital Economics have also remarked that new administrations can only do so much to boost growth and productivity, with just two of nine governments since 1955 presiding over a period of faster GDP growth than their predecessor.

His remarks on Monday morning underpin the Chancellor's intention to cut through the noisy gloom hitting UK plc. But bosses are unlikely to receive any instant remedy for their woes in the coming months. With the Timms and Milburn reviews reporting after the Budget and the OBR's September snapshot likely to shape the numbers he inherits, the first hard test of Healey's growth agenda will come sooner than his rhetoric suggests. Healey wants to get the UK economy back on track – but the corner he is driving it towards looks difficult to get around.