The fallout from John Healey's first Budget

Kaylie Pferten says the Budget will leave the UK facing sluggish growth and stubborn inflation, while remaining heavily dependent on bond-market borrowing.

One revealing detail in John Healey's first Budget as chancellor was his decision to abandon the previous Budget's plan to cut the cash individual savings account (ISA) limit from 20,000 to 12,000. Commentators cast the reversal as an acknowledgment that saving needed encouragement. It wasn't. Just days before, Hargreaves Lansdown had announced a low-cost money-market fund offering daily access and an expected yield of 3.95%.

This and similar money-market funds would still have qualified for the full 20,000 allowance in stocks and shares ISAs, even though they were virtually indistinguishable from cash. Rachel Reeves, the previous chancellor, cut the cash ISA limit without realising that money-market funds created a huge loophole; neither her team nor the Treasury had spotted it.

Chancellors and the Treasury routinely miss the effects of their budget decisions; this Budget offered plenty of evidence. The prime minister announced that pensioners with no other income would pay tax on the portion of their state pension above the tax-free allowance, apparently without considering the administrative problems that would follow. Now officials face the awkward task of enforcing the rule and applying tapering relief to 210,000 pensioners who have a small additional income.

Raising the tax rate on savings and property by another 2% - while leaving dividends untouched - is forecast to bring in more than 500 million in a full year. But the change may push savers toward dividend-paying investments instead of interest or rent. Plenty of low-risk investment trusts in the "alternatives" sectors already offer yields above cash, and those yields are growing. Healey might have had more success presenting the measure as an incentive to accept greater investment risk. The revenue calculation also assumes interest rates will not fall, despite the fact that he presumably hopes they do.

To be fair to John Healey, these figures are nowhere near as absurdly optimistic as Rachel Reeves's estimates of the revenue her measures would raise. Still, Healey is meant to be a pragmatist, not someone guided by ideology. He must now work within the assumptions built into Reeves's Budgets, where money supposedly raised has already been spent. His position therefore depends on stronger-than-expected growth generating extra revenue and next year's spending review finding substantial savings.

At least the gilts market took the Budget in stride, brushing aside the pile of small changes meant to disguise the absence of any major initiative. Bond investors may finally be noticing that, although the prime minister speaks to the left, his actions are Blairite. Once the left understands that it has been misled, the chance to respond will have gone; besides, with the next election drawing closer, Burnham has no real alternative.

Will Burnham go to the country?

Some commentators say the government is merely "kicking the can down the road", delaying the painful decisions that could keep a budget crisis at bay - decisions that would break its manifesto promises. Revenue forecasts may be too hopeful, and the safety margin is thin, so a crisis cannot be ruled out. A more likely outcome, though, is sluggish growth alongside stubborn inflation, leaving the chancellor constantly trying to calm the gilts market while keeping Labour's backbenchers onside.

The proposed escape route is straightforward: hold a general election before Burnham's honeymoon with voters ends. With a fresh mandate, he could discard the previous manifesto and its tax limits, then pursue a far more radical programme.

The danger goes beyond the strategy itself. Polls offer little encouragement, voters dislike early elections, and many may suspect a hidden motive. Stanley Baldwin was the last prime minister with a comfortable majority to seek a premature election, in 1923, though his parliamentary majority was less than half Burnham's. He, too, had only recently become prime minister and wanted public backing for a sharp change in direction. He lost.

Keep on investing

Investors need not panic while the UK economy continues to look grim. Its performance has little bearing on the UK stock market, and gilt yields may already have peaked. The bigger issue is the approaching US midterm elections. The result itself matters less than what tends to happen in the market afterward - particularly when the vote produces political gridlock. Over the past century, the S&P 500 has gained nearly 20% on average from the beginning of the midterm quarter through the middle of the following year. It has fallen during that period only once, in the early 1930s.