The resignation of Keir Starmer and the prospect of Andy Burnham becoming prime minister elicited a surprisingly subdued reaction from the Square Mile and investors generally. The FTSE 100 dipped slightly before recovering, while bond yields—which directly affect UK borrowing costs—moved in the opposite direction. These movements were far from the dramatic swings seen during other seismic political events.
Why the Muted Response?
One explanation for the apparent apathy is the slow-motion nature of the political crisis, compounded by the frequent turnover of prime ministers in recent years. Investors have become accustomed to instability at Number 10. Another factor is the wait-and-see approach to a Burnham premiership, given uncertainty about his economic policies.
Andy Burnham, known as the 'King of the North', is viewed as the most left-leaning and least market-friendly among potential successors, including Angela Rayner, Ed Miliband, and Wes Streeting. His support for renationalising industries like water has won public backing but unsettled investors concerned about broader state intervention.
Burnham's Fiscal Commitments
Despite his left-wing reputation, Burnham has pledged to adhere to the government's fiscal rules and Labour's manifesto commitments not to raise income tax, national insurance, or VAT. This strategy aims to reassure the City but risks limiting his ability to fund ambitious reforms, mirroring the constraints faced by Chancellor Rachel Reeves.
The demand for change has grown since the 2008 financial crisis, with many feeling left behind. Burnham insists he has heard these concerns, but with limited room for tax increases or spending cuts, he must avoid missteps like the winter fuel payment controversy or the rise in employers' national insurance, which has hurt the jobs market.
Borrowing and Market Risks
Given the fiscal constraints, Burnham and his chancellor will likely need to borrow more. This is problematic as UK borrowing costs are already the highest among G7 nations, and national debt approaches £3 trillion. Burnham has stated the country should not be 'in hock' to bond markets, but he must tread carefully.
The identity of the next chancellor is also crucial. Rachel Reeves is seen as credible, and replacing her could trigger a sharper market reaction, depending on her successor.
In summary, while the initial investor response has been subdued, the new prime minister faces significant challenges to win over voters and prevent a shift towards Nigel Farage's Reform UK. Success could bring real change; failure risks worsening public sentiment.
