John Healey delivers his first Budget next week facing the same challenges that dogged Rachel Reeves: a sluggish economy and squeezed household incomes amid a cost of living crisis that feels permanent. The Chancellor has pledged to meet his predecessor’s fiscal rules, the clearest signal to markets that borrowing will stay under control, but his personal commitment to increased defence spending over the next few years and his Prime Minister's ambition for public services leaves him with unenviable choices to make. He also has four audiences to satisfy at once: voters, MPs, the Cabinet and the gilt market. Here are four tests the Budget has to pass.

At last year's Budget, Rachel Reeves left herself ‘headroom’ of £23.6 billion. That means there was a £23.6 billion buffer between her plans and the self-imposed constraints of the fiscal rules - there to protect the government from unforeseen circumstances. And Reeves’ decision was vindicated: the economic impact of the war means most of her headroom will have been eroded by higher energy prices, inflation, borrowing costs and a weaker economy. Healey will need to decide how far he wants to restore that headroom.

The more headroom there is, the more confident the Chancellor can be that he’ll fall on the right side of his rules this year and the more the markets will be confident the government has its spending and borrowing under control. Market confidence matters because if the UK isn’t seen as a safe bet, we’ll be charged more to borrow, pushing up interest rates for the government (and everyone else) with less to go round on other priorities. But every pound of headroom is a pound of higher taxes or lower spending, and one not spent on this government’s priorities. The Prime Minister has promised not to touch income tax, VAT and National Insurance. That means he’ll need to look to other taxes to bring cash in - with rumours that the bank levy and mansion tax are on the list of where he will look.

The Prime Minister promised he would give voters ‘space to breathe’ through support on the cost of living - with a raft of measures in his first week. But the 5% cut to VAT on electricity bills has already been swallowed by rising energy prices - which are set to go up further with the typical bill projected to rise by £275 in January. As a result, 1.7 million households say they won’t turn the heating on. Energy bills are one of the few components of household spending where the government can straightforwardly intervene without the risk of fueling inflation. It can cut costs while driving electrification, the surest long-term route to a more affordable, clean and secure energy system. We think two measures should be in play.

First, restructuring energy bills. Move the remaining electricity levies onto general taxation, abolishing the gas standing charge and forgiving electricity debt. Together these would save the typical dual-fuel household £98 a year. Abolishing the standing charge costs the Treasury nothing and would leave 84% of the poorest households better off.

Second, introducing a gas price stabiliser. Volatile gas prices have wreaked havoc. Establishing a stabiliser would see the government subsidise gas prices when they rise, and tax them when they fall - giving households longer-term certainty. It would cost around £3.2 billion at the peak, should pay itself back by summer 2028 and limit inflation spikes from gas shocks. This is based on our analysis of GB gas prices using the Office for Budget Responsibility’s (OBR) forecast methodology.

Together with restructuring bills, the package would cost the Treasury about £1.3 billion a year on average over five years, depending on energy prices. The reported Warm Homes Discount expansion would cost about £1 billion and reach far fewer people.

The Budget will require Healey to settle outstanding debts from this year, adjust any spending plans for next year and provide revised forecasts for spending by departments beyond that.

The first will involve fights. The Defence Investment Plan, the cost of living measures announced in July and overspends in key public services like the NHS will all need funding. That means departments across government will be forced to find money to cross-subsidise.

The second, the winners for next year, will demonstrate an early sign of where the Burnham government wants to prioritise. We’ve already had the announcement of a new help to buy scheme for first time buyers. The Prime Minister has promised the biggest council house programme since the war, so will the Chancellor take further steps to fund or unlock a housebuilding market that is stuttering?

And then finally, we will get to see if there are any changes to the longer-term forecasts for departmental spending. These assume big cuts in public spending in later years - cuts there are almost certainly no plans for when or how to implement. Two of the government’s biggest priorities are around welfare and social care, both subject to the ongoing Milburn and Casey reviews respectively. They’ll loom large over this Budget, but Healey won’t actually have to set out the fine print until later. However the Chancellor may well feel pressure to set out when he plans to reach 3% of GDP being spent on defence, after the previous Chancellor’s unwillingness to do so prompted his own resignation.

When he thinks about longer-term plans to tackle rising public service costs, prevention has to be the name of the game. Obesity costs the NHS more than £12 billion a year, with economic costs through reduced productivity estimated at around £31 billion per year. Introducing the healthy food standard this Parliament is one of the biggest opportunities to reduce obesity without increasing the cost of living or ratcheting up the NHS bill.

When he announced the Budget date, Healey promised it would move money and power out of Westminster. Burnham has said devolution is central to his growth agenda.

So the Budget will be the moment where details of fiscal devolution will be agreed, with a Rewiring the State white paper and implementation timetable alongside. We will learn the breadth of taxes covered and the depth of power. Mayoral Strategic Authorities will want to see the timetable over which the powers land in their hands.

The second plank of Burnham’s theory of growth is public control over economic infrastructure. The plan for achieving that will follow in the 10 Year Plan, due before Christmas - but this is an opportunity for downpayment on that. But as well as those big essentials like housing, energy and transport, Healey will need to prove he’s got a vision for both the frontier economy in the UK and our big strategic industries. For frontier technologies, we think the Chancellor should establish a new series of challenge prizes to put tech to work in solving big public service challenges. For the strategic sectors, reducing industrial energy costs could help drive growth. Finally, the Chancellor should look at schemes that help roll out new technology and top management practices across the economy.

What’s at stake overall?

The Prime Minister has promised to end forty years of neoliberalism and fundamentally change and rewire the country. Even in the very best of times, that is not the work of a single Budget, let alone a single parliamentary term.

But there are likely only two more Budgets between now and the next election. With huge ambitions and only three years, this government can’t afford to have non-event-fiscal-events. The 28 October is the first time this young government will be forced to put pound signs against their priorities, and it will tell us more about the true level of ambition than we’ve seen yet.