Andy Burnham would enter Downing Street already “boxed in” by financial markets if he signals a rise in borrowing to pay for a more expansive policy agenda, bond investors have warned.
The newly elected MP for Makerfield, who is widely expected to be the next prime minister, could also quickly come under pressure if he chooses a chancellor who is seen to be too leftwing by bond markets.
“He is boxed in by the fact that government finances are in a weak position, and if he chooses to ignore this reality, then he could find himself under pressure very quickly,” said Mark Dowding, chief investment officer at the hedge fund RBC BlueBay.
With Liz Truss’s disastrous mini-budget still casting a shadow over UK fiscal policy, Burnham alarmed some investors last year when he said the UK was “in hock” to the bond markets, a stance he has since moderated in interviews.
Dowding said: “Markets are more prone to be sceptical at the outset if he tries to be too adventurous … from that perspective Burnham could be walking a tightrope partly of his own making. It won’t take too many headlines for the bond markets to suddenly be on its back.”
If he does become prime minister, the former Manchester mayor will be expected to follow through on pledges such as nationalising key utilities and a council housebuilding programme.
How he pays for them remains unclear. During his campaign for the Makerfield seat, Burnham committed to the fiscal rules set by Rachel Reeves, in a signal that he would not oversee a dramatic rise in borrowing.
But he has also committed to Labour’s manifesto promise not to raise income tax, VAT or national insurance, limiting how much he can raise money from taxpayers.
“It is a very challenging backdrop for Burnham to come in against. He needs to deal with what is in front of him, not what he’d like to be inheriting,” said Andrew Goodwin, chief UK economist at Oxford Economics.
“Anywhere he wants to spend more, he’s going to have to either cut spending elsewhere to finance it, or he’s going to have to increase taxes,” he added. “This isn’t a time where you can come in and pursue really big picture ideas.”
On Tuesday, one of the people who has been advising Burnham called for billions of pounds more borrowing to pay for investment in infrastructure.
Jim O’Neill, a former chief economist at Goldman Sachs and minister, said he wanted the government to create an independent body for infrastructure spending that could be freed up to spend significantly more on major projects.
He said: “There is a lot more room under the existing fiscal rules to borrow for investment, and the next chancellor should take advantage of that. We can do way more to boost infrastructure projects, and that is what we should be doing.”
His choice of chancellor will be a key indication of which way things could go, said Jonas Goltermann, chief markets economist at the consultancy Capital Economics.
Wes Streeting, the former health secretary, would be seen as “prioritising party unity and, presumably, a more centrist fiscal approach over pleasing the Labour left”, he said. “That would be a positive for gilts.”
Ed Miliband, the energy secretary and a Treasury adviser under Gordon Brown, would be widely expected to take a more interventionist approach.
But Dario Perkins, managing director of global macro at the consultancy TS Lombard, and also a former Treasury adviser, said: “This is a guy that worked in the Treasury for a long time and presumably understands the constraints from the bond market.
“I’d be amazed if even if he was going to go on some spending spree, I think he’d be extremely uncomfortable with that.”
Perhaps more important still, said Goltermann, will be something entirely out of Burnham’s control: luck.
“For the bond market, politics matters a lot, but what happens in the rest of the world matters arguably much more,” he said, pointing to the Iran war, which caused energy prices and, in turn, bond yields, to spike earlier this year.
That trend that “seems to be unwinding now”, he added. “If it continues then that’s nothing to do with Burnham but it would help his position. He might just be more lucky than Starmer.”
