The City of London is bracing for a seismic shift in fiscal policy as Andy Burnham emerges as the frontrunner to succeed Rachel Reeves as Prime Minister. Labour’s internal manoeuvring has sent gilt yields spiking and sterling into a tailspin, as markets price in the very real prospect of a Burnham premiership. For those of us who have watched fiscal discipline erode under Starmer, this is yet another chapter in the long, painful saga of British economic decline.
Reeves, once hailed as the safe pair of hands, has seen her reputation shredded by a series of U-turns and spending commitments that would make even Gordon Brown blush. The market’s verdict? A sell-off in UK sovereign debt that has pushed the 10-year yield above 4.5 per cent, a level not seen since the Truss mini-Budget debacle. Capital flight is already underway, with foreign investors dumping sterling-denominated assets at an alarming rate.
Enter Burnham. The Mayor of Manchester has positioned himself as the man to unite the party’s warring factions, but his economic credentials are, to put it mildly, unproven. His pitch of ‘levelling up on steroids’ and a new ‘Green New Deal’ has sent shivers down the spines of bond vigilantes. The shadow chancellor, whoever that may be, will inherit a fiscal mess: national debt at 98 per cent of GDP, a current account deficit that shows no sign of narrowing, and a Bank of England that has already hoisted rates to 5.25 per cent.
The immediate question is whether a Burnham leadership will accelerate the fiscal reckoning. His allies talk of higher taxes on the wealthy and a crackdown on corporate tax avoidance, but the reality is that the UK’s tax burden is already at a 70-year high. Further hikes will only suppress growth and drive more capital to friendlier shores. The FTSE 250, the bellwether for domestic sentiment, has already dropped 3 per cent on the news.
What concerns me most is the lack of any credible plan for fiscal consolidation. Reeves, for all her faults, had at least paid lip service to the need to bring down borrowing. Burnham seems determined to spend his way out of trouble, ignoring the basic arithmetic of compounding debt. The Office for Budget Responsibility’s latest forecasts show that even under Reeves’s stated policies, public sector net debt would reach 110 per cent of GDP by 2028. Under a Burnham spending spree, that number could easily hit 120 per cent.
The market’s response has been swift and brutal. Sterling has fallen 1.5 per cent against the dollar, making imports more expensive and stoking inflation at a time when the Bank of England is desperate to squeeze it out. The yield curve is steepening, a classic sign that investors are demanding a higher premium for holding UK debt. This is not a vote of confidence.
In the City, the chatter is about capital controls. That is how far trust has eroded. Investment banks are already drafting contingency plans for a disorderly sell-off. The Bank of England, meanwhile, faces a terrible choice: hike rates further to defend the currency or hold steady and risk a flight into US Treasuries. Neither option is palatable.
The truth is that Burnham’s likely ascent is a symptom of a deeper malaise. Labour, like the Conservative party before it, has abandoned fiscal orthodoxy in favour of short-term political fixes. The result is a slow-motion crisis that will ultimately end in higher taxes, weaker growth, and a diminished role for the UK on the global stage. For those of us who remember the days of fiscal responsibility, it is a sorry spectacle.
As I write, the pound is trading just above $1.18. The spread between UK and German 10-year bonds has widened to 200 basis points. The cost of insuring UK sovereign debt against default has hit a two-year high. The markets are screaming a simple message: stop digging. But with Burnham likely to take the reins, I fear they are just getting started.
