Key facts
- UK government borrowing costs surged after Prime Minister Andy Burnham signaled increased government borrowing.
- Burnham indicated plans to utilize "flexibility" within existing fiscal rules for new announcements.
- The 10-year gilt yield rose above 5%, and the 30-year gilt yield hit its highest level since the Middle East conflict began.
- Sterling fell 0.2% against the dollar.
- Shabana Mahmood is reportedly set to replace Rachel Reeves as Chancellor.
UK government borrowing costs surged on Monday afternoon after Prime Minister Andy Burnham suggested his administration would increase government borrowing by taking advantage of "flexibility" within existing fiscal rules. Burnham, who was confirmed as Prime Minister earlier in the day, told reporters that his government would adhere to the current fiscal rules but utilize any available room within them.
The remarks immediately prompted bond investors to sell off UK government debt, with the sell-off concentrated in longer-duration borrowing. The yield on the 10-year gilt, a key benchmark for the UK's long-term borrowing capacity, climbed as much as eight basis points to break five percent for the first time this week. The yield on the 30-year gilt rose nine basis points to its highest level since the conflict in the Middle East.
Shortly after these comments, Burnham replaced Rachel Reeves as Chancellor, with Shabana Mahmood reportedly being the favored successor. The decline in gilt prices, which move inversely to yields, highlights the fiscal challenges facing Burnham's new administration. High borrowing levels and persistent inflation have already contributed to the UK having higher borrowing costs than other G7 economies. Economists suggest that the UK's reliance on international energy markets will continue to fuel inflationary pressures as long as the conflict in the Middle East persists.
Neil Wilson, a strategist at Saxo Markets, noted emerging signs of market nervousness, stating that the "mood music" from the new government suggests a potential for significant spending. In parallel, Burnham's camp has floated the idea of unfreezing the income tax threshold, a move that could cost at least £4bn depending on inflation rates. This policy, which would lift the basic rate threshold to £13,000 and the upper threshold to £52,000, is being taken seriously by some unions. The UK has been in the midst of a nine-year threshold freeze, extended until 2030-31, which has pushed many workers into higher tax brackets.
Burnham also plans to publish a 10-year plan for the country and economy, detailing his wider plans on decentralization, devolution, and rebuilding Britain. This is expected to include significant infrastructure programs, funding for the Defence Investment Plan, and a national plan to end rough sleeping, with initial funds released from the housing budget. He also anticipates progress on "sustainable reform" in welfare, likely based on Alan Milburn's review, focusing on job support and mental health assistance for young workers to reduce welfare bills.