(May 19): Andy Burnham, the current favourite to replace Keir Starmer as the UK prime minister, ruled out changing the government’s limits on borrowing if he were to gain power, in a bid to reassure investors about his fiscal plans.
A spokesperson for the Greater Manchester mayor told Bloomberg on Monday that he wouldn’t make any changes to current Chancellor of the Exchequer Rachel Reeves’ fiscal rules if he were to enter 10 Downing St after any leadership election later this year. Crucially, the spokesperson also ruled out exempting defence spending from the constraints.
UK bonds extended earlier gains on Monday, with yields down seven to eight basis points across the curve before cash trading stopped at 5pm. Gilts rose further at the open on Tuesday, with the 10-year yield falling three basis points to 5.07%, getting an additional boost from weaker labour market data which implies less urgency for interest rate hikes.
The intervention will be viewed as an attempt to reassure investors who have been wary that a Burnham premiership could see a tilt to the left and an increase in public borrowing. The comments could, however, disappoint some on the left of the governing Labour Party who were hoping for a more radical policy agenda.
Under the current rules, the chancellor must balance day-to-day spending with tax revenues by 2029/30 and reduce debt — as measured by public-sector net financial liabilities — as a share of gross domestic product by the same point. Those rules had already been changed by Reeves to allow for more borrowing to fund Labour’s investment plans.
The statement followed days of questions about what sort of fiscal policy Burnham would adopt if he were to succeed the embattled Starmer. More than one-fifth of Labour’s members of Parliament have urged the prime minister to step aside in the wake of disastrous local election results earlier this month, with many favouring Burnham or another replacement from the party’s left.
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Burnham had floated the idea of exempting defence spending from the fiscal rules in an interview with Bloomberg last month amid calls for Europe to a build a more credible sovereign military deterrent. While Burnham told broadcaster ITV over the weekend that he “supports” the current fiscal rules, his representatives had repeatedly declined until late Monday to rule out making any changes in future.
While there are plenty of hurdles on Burnham’s path to Downing Street, the prospect of him becoming the prime minister has been seen as a risk by traders, who fear he might increase public spending and gilt issuance. Although he has said that his remarks last year about the country being “in hock” to bond markets were taken out of context, they continue to resonate with investors.
See also: IMF tells UK to stick to fiscal plan as Starmer rivals circle
Gilts posted a sharp sell-off last Friday on higher oil prices and the news that Burnham had a potential route to Westminster. While yields have retreated from their recent highs, the 30-year is still near the most elevated levels since 1998.
The remarks by Burnham’s spokesperson came after the International Monetary Fund urged Britain to stick to Reeves’ plans on deficit reduction, adding that the economy could be harmed by “domestic uncertainty”. The fund also warned the UK is approaching limits on how much it can increase taxes without major reforms, after Labour’s first two budgets included steep hikes.
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