Andy Burnham’s decisive victory in the Makerfield byelection did not trigger the bond market rout that supporters of Rachel Reeves had warned about. However, as he moves closer to the premiership, Burnham must set clear expectations on tax and spending and be upfront that not everyone can be a winner, according to observers.
Market Reaction and Timing
The yield on UK government bonds rose modestly on Friday, but the relative calm was partly because a Burnham win was already priced in and because he promised to stick by Reeves’s budget rules. His timing was also fortunate: better-than-expected inflation figures earlier in the week eased market concerns about the Iran war’s impact on the cost of living, helping to bring yields down.
But Burnham’s every pronouncement—and that of his future chancellor—will now be watched intently by the markets. If his team is serious about nationalising key utilities, they may want to borrow significantly more. Reeves’s rules allow for this when the government gets a financial asset, such as a shareholding, in return. The logic is that the nation’s balance sheet barely changes if it takes on new liability to bondholders but gains a financial asset. However, bond markets may be wary if a Burnham government cannot show it has a plan to make ends meet for day-to-day spending on pensions, benefits, and public services.
Lack of Clear Plan
Burnham showed little sign of a plan during the brief Makerfield campaign. He mused about helping Waspi women—an idea quickly rescinded. He said he was not a fan of Reeves’s rise in employer national insurance contributions (NICs), which brings in £25bn a year. He also expressed interest in halving VAT for the ailing pub industry, though the industry’s struggles are partly due to people going to the pub less. At the same time, he has said he will stick by Labour’s manifesto promise to maintain the pensions triple lock for this parliament and honour the pledge not to raise income tax or NICs on workers—which forced Reeves to increase employer NICs. He also wants to cut utility bills, but greater public ownership may take time to drive down bills, and water bills are already set by Ofwat to account for needed investment. On electricity, more could be done to shift levies from consumers to general taxation, but costs would have to be found elsewhere.
Fiscal Challenges Ahead
Burnham’s hints at largesse come against worse-than-expected public borrowing figures, eyewateringly tight spending plans pencilled in by Reeves for the back end of this parliament, and a looming row over defence. John Healey resigned over Starmer and Reeves’s decision not to fully fund the defence investment plan—allocating £13bn of the £18bn he asked for by 2030, and only by slicing capital budgets of other departments. Burnham and his chancellor will rapidly have to decide whether to make more resources available to the Ministry of Defence and how to fund them.
There are options for tax increases that avoid Labour’s manifesto pledges. Burnham could raise capital gains tax again, impose the bank tax Reeves flirted with but ditched after City lobbying, or tinker with the “mansion tax” on high-value homes due in 2028. Announcing a wealth tax would be a powerful symbol, though practicalities are challenging. On spending, scrapping the triple lock could save billions. The Resolution Foundation’s Ruth Curtice noted that pensioners have seen living standards rise three times faster than other groups over the past 20 years and are no more likely to be in poverty. Some form of smoothed earnings uplift would be fairer and more predictable.
Need for Clear Fiscal Plans
It is a mistake to reduce economic policy to a dry debate about tax and spend, but only by setting out clear and realistic fiscal plans can a chancellor quieten market noise and make space for everything else. Labour spent the latter half of the past two years stymied by speculation about tax rises. Markets, businesses, and consumers dislike uncertainty, and their decisions can set the economic agenda. With the Iran war likely to continue affecting the economy, the UK cannot afford another summer of stasis, let alone a bond market selloff that would drive up interest rates and raise the cost of everything Burnham wants to achieve.
