UK Politics: Good Times for a Change

Key takeaways

1. Burnham brings political momentum, but fiscal space is tight. His agenda is ambitious, but markets will want to know how it is paid for.
2. The Chancellor pick will be an early credibility test. Investors will look for reassurance that fiscal discipline survives the leadership reset.
3. The big question is, can Burnham turn vibes into delivery? Manchester gave him the story; Westminster will test the economics.

Last February, we wrote about the options open for a new leader of the Labour party¹ framing the debate between a continuity candidate and a Popular/Party candidate. Over the following months, Andy Burnham has become both options and is set to be the only candidate for the job, when nominations close on 17 July.

Burnham has served in the cabinet before under Gordon Brown for three years, bouncing through three jobs: firstly six months as chief secretary to the treasury, then 18 months in culture, media and sport and for the last 10 months, health. There is more breadth than depth, something that may serve him well.

But that was also 16 years ago, and after a spell in the shadow cabinet, two failed attempts to become leader, where he was beaten by Ed Miliband and Jeremy Corbyn, he left Westminster to take up his now famous role as mayor of Manchester.

In many respects, as he returns to Parliament, his career and his policies in Manchester have echoed those of Joseph Chamberlain in Birmingham in 1870s. Burnham is credited with re-inventing the City, declaring ’business friendly socialism’ just as Chamberlain promised Birmingham would be ’parked, paved, assized, marketed, gas and watered and improved’.²

So what does this experience bring to Westminster politics? How should investors greet this new start two years into a political five-year cycle. Clearly, the devolution of power to the regions and cities will be a central theme, as outlined in his speech “What Manchester does today, the world does tomorrow” made in 2024.³

He has spoken about nationalising water and energy (as did Chamberlain), improving defence, starting a council house building program, all while staying within the fiscal rules set by his predecessor’s chancellor, Rachel Reeves.

These ideas would cost. Nationalising energy and water would cost north of £300bn, on top of a government debt that equals GDP at £2.9 trillion. Any move on defence would be upwards of £10bn and must be spent now. And, a serious council house building program, aiming for 100,000 units a year would cost at least £20bn once up and running. Every £10bn spent is the equivalent to 1p on the basic rate of tax.

These may be worthwhile political projects but how do you balance the books? The fiscal rules are already imperilled by significantly higher borrowing in this fiscal year, in part due to the Iran war. The tax take has risen to a post-1950 high of 37% of GDP from 34.5% when Labour won the election in 2024. It will rise above 38% in the next two years.⁴

The Office of Budget Responsibility (OBR) is also looking at the disincentives that the current higher level of tax has on ’incentives to work, save and invest’ and will publish a report on 7th July with their conclusions, crucial as it will be before nominations for leader close.⁵

As prime minister, his choice of chancellor will be vital. It must signal a break with the past poor economic performance yet re-assure the markets that there is not an acceleration of unfunded spending. The UK government spends almost 3.3% of GDP on interest expenses, compared to say France which has much more debt as a percentage of GDP (120%), but which costs only 2.3% of GDP. 

Leading contenders are Wes Streeting, John Healey and Yvette Cooper, all of whom would be greeted with relief. The next budget is not due until November, so there is ample time to refocus within the restraints.

The preferred candidate of the left for this post is former leader Ed Miliband. This would be seen as a risk, given his aggressive stance on de-carbonisation and in other spending areas.

The new chancellor will also be faced with a critical decision as to who should lead the Bank of England, Andrew Bailey is due for replacement or re-appointment in March 2028.

Almost as important as the chancellor will be the team in the treasury, and their advisers. Expect current treasury minister Jim O’Neill and the former head of the OBR, Richard Hughes, to be involved, as well as Miatta Fahnbulleh, Labour MP for Peckham and previous CEO of the New Economic Forum, who have championed financial sector reform.⁶

In terms of taxation, there has been an assurance that income tax, VAT and National Insurance contributions by employees will remain untouched. That leaves wealth taxes such as mansion taxes, land capital taxes and capital gains taxes as strong possibilities.  All of these are harder to collect as those paying them are able to mitigate.

In conclusion, the room for manoeuvre, unless an aggressive spend and taxation policy mix is pursued, is limited and the cost in the markets could be destructive, as with Truss, with sterling weakening, rates rising and equities languishing.

Finding the right policy mix is made tougher by the fact that there is little time left to make a significant impact on the economy before the next election. Which levers do you pull which work fast enough and still stay within prudential limits: Housebuilding NIC thresholds, acceleration of the GB Bank for infrastructure.

One Keir Starmer supporter is said to have said about Burnham: “You can’t govern on vibes”, but that is missing the point. Sir Anthony Seldon, in his book “The Impossible Job” (a history of the office of prime minister since its creation in 1720), sets out the key tenets for success:

1. Know the two things you want to achieve
2. Have a key enforcer who runs your office and drives these aims forwards for you
3. Do not get involved in day-to-day issues but remain focussed on the strategic aims
4. Never get into something unless you know the exit
5. You may not achieve your two aims because ’events’ will get in the way. But you will be remembered for how you handled them. Find a team who will be able to do that.

Can the new PM succeed where the old did not? If not, the next election, whether it is in 2028 or 2029, will result in a real step into the unknown with a hung parliament potentially led by Reform. Financial markets will give the new Burnham leadership plenty of opportunity to prove ’better the devil you know to the devil you don’t.’