Key facts
- Prime Minister Andy Burnham has promised "breathing space" for British households regarding the cost of living.
- Announcements on cost of living policies are expected as soon as Tuesday.
- Burnham inherits an economy with high government borrowing costs, with the UK paying over £100bn annually on debt interest.
- Inflationary pressures, exacerbated by geopolitical events, mean the Bank of England's central interest rate is unlikely to fall until 2027.
- Business leaders have reported profound pessimism about the UK's economic outlook, driven by domestic factors.
- UK productivity levels have fallen since 2022 and remain significantly below the G7 average.
Prime Minister Andy Burnham has pledged to provide "breathing space" for British households struggling with the cost of living, with policy announcements anticipated as early as Tuesday. His administration inherits a challenging economic environment characterized by high government borrowing costs, persistent inflation, and sluggish productivity.
Burnham's remarks contrast with his predecessors, Rachel Reeves and Starmer, who defended their tenures. Burnham, however, accurately assessed the nation's economic bind, stemming from years of low growth, high government spending, and a tax burden exceeding post-war highs. Thomas Pugh, chief economist at RSM UK, noted that Burnham faces the same "fiscal trilemma" as his predecessors: satisfying spending demands without breaking tax commitments or fiscal rules.
The UK's borrowing costs have been the highest in the G7, forcing ministers to allocate an ever-shrinking portion of the budget to public services. Britain now pays over £100 billion annually on debt interest, a sum comparable to the entire education budget. Kathleen Brooks of XTB markets suggests Burnham must control public spending and avoid stoking price rises to lower bond yields and free up funds for spending or tax cuts.
Inflationary pressures, partly driven by geopolitical events like recent air strikes on Iran, have led to expectations that the Bank of England will keep its central interest rate on hold until 2027. Henry Cook, UK economist at MUFG, stated that rate-setters are unlikely to hike rates this year but will monitor Burnham's policies for any inflationary impact, particularly concerning employment costs.
Britain's private sector has experienced profound pessimism due to economic and political volatility, including Brexit, the pandemic, the energy shock from the Ukraine war, and the cost-of-living crisis. Labour's initial focus on a fiscal black hole and subsequent budget measures, including payroll tax raids and minimum wage hikes, have further dampened business confidence, leading to weak hiring and investment. Anna Leach, chief economist at the Institute of Directors, highlighted domestic factors as dominant drivers of this weak confidence.
This lack of investment contributes to the UK's stubbornly low productivity levels, with output per hour worked falling since 2022. Britain's productivity is nearly a fifth below that of the US and below the G7 average, resulting in slower growth, reduced prosperity, and lower tax revenues. Early signs suggest a potential turnaround in productivity, but maintaining this nascent recovery is crucial.