Key facts
- Bond investors have warned Andy Burnham against signaling a rise in borrowing to fund an expansive policy agenda.
- Analysts suggest that increased spending would require either cuts elsewhere or tax hikes.
- Jim O’Neill called for an independent body for infrastructure spending to borrow more for major projects.
- The choice of chancellor will be a key indication of fiscal approach.
Bond investors have cautioned Andy Burnham, widely expected to be the next prime minister, against signaling a rise in borrowing to fund an expansive policy agenda, warning that such a move could quickly put him under pressure from financial markets. Mark Dowding, chief investment officer at RBC BlueBay, stated that Burnham would be "boxed in" by the weak government finances and could find himself under pressure if he ignores this reality. Dowding added that markets might be skeptical of adventurous policies from the outset, suggesting Burnham could be "walking a tightrope partly of his own making."
Burnham has pledged to follow through on promises such as nationalizing key utilities and a council housebuilding program, but how these will be funded remains unclear. While he committed to fiscal rules set by Rachel Reeves during his campaign for the Makerfield seat, he also promised not to raise income tax, VAT, or national insurance, limiting revenue from taxpayers. Andrew Goodwin, chief UK economist at Oxford Economics, noted that any increased spending would necessitate either cuts elsewhere or tax hikes, stating, "This isn’t a time where you can come in and pursue really big picture ideas."
One of Burnham's advisers, Jim O’Neill, a former chief economist at Goldman Sachs, called for billions of pounds more borrowing to fund infrastructure investment. O’Neill suggested creating an independent body for infrastructure spending that could be freed up to spend significantly more on major projects, arguing there is "a lot more room under the existing fiscal rules to borrow for investment." The choice of chancellor will be a key indicator of fiscal direction, according to Jonas Goltermann, chief markets economist at Capital Economics. Goltermann suggested that Wes Streeting would likely prioritize party unity and a more centrist fiscal approach, which would be positive for gilts, while Ed Miliband might take a more interventionist approach. However, Dario Perkins, managing director of global macro at TS Lombard, expressed surprise if Burnham were to embark on a spending spree, given his background in the Treasury.
Ultimately, Goltermann noted that external factors beyond Burnham's control, such as global events like the Iran war which spiked energy prices and bond yields earlier this year, could significantly influence the bond market.