Andy Burnham prepares to replace Keir Starmer amid clear economic headwinds. The prime minister-presumptive has committed to a “new direction” for Britain, but the same old problems persist: elevated borrowing, national debt at its highest since the 1960s, weak growth, and rising demands to spend on defence, net zero, and an ageing population. Under pressure from bond markets, he has pledged to stick to Labour’s current fiscal rules.
Falling Energy Prices Offer Some Relief
However, there are signs Burnham could catch a break. The recent pullback in energy prices, gilt yields, and City expectations for interest rates are easing the hit to public finances brought by the US-Israeli war on Iran. The global oil price has fallen to $72 a barrel, levels last seen before the war, and some analysts forecast it could drop to $60 by year-end. As a result, economists see a potential turning point: inflation risks are fading, easing pressure on central banks to hold rates high. Financial markets have rallied, and UK government borrowing costs have fallen from recent highs.
At the peak of hostilities, there were fears UK inflation could rise to 4.5% and GDP growth fall to about 0.7% this year. Now Capital Economics estimates inflation closer to 3.5% and GDP growth of 1%. It expects the Bank of England could cut rates from 3.75% to 3% next year. Bank of America had estimated the £23.6bn of “headroom” Rachel Reeves had against the main fiscal rule had been reduced by about £10bn due to the Iran war; now it estimates a hit of about £4.6bn. Others predict little or no impact.
Long-Term Challenges Remain Daunting
Burnham will need more than luck to fix long-term challenges. Inflation remains higher than without the Middle East conflict, growth is faltering, and households are under serious strain. The capacity for a leftfield shock remains high, especially with an unpredictable US president in office. Voters are fed up, and times are still hard. Burnham must act fast with the next general election approaching.
Keeping some fiscal headroom is important to assuage City concerns. With Keir Starmer’s defence investment plan leaving £4.7bn over four years of unfunded spending, Burnham starts on the back foot. His promises of higher spending on council housing, infrastructure, and cost-of-living support will not come cheap. A Burnham government would likely need tax increases, yet he has committed to Labour’s 2024 manifesto promise not to raise taxes on work, which are major revenue-raisers.
Debate Over Timing and Approach
Within Burnham’s camp, there is debate over the mix of caution and radicalism, and the timing of any cost-of-living package—immediately or alongside an autumn budget. Insiders want to avoid the drawn-out tax speculation seen between Labour’s July 2024 landslide and Rachel Reeves’s first budget. “If you do it in autumn can you accelerate the process in some way? Can you bring it forward a little bit?” says one figure close to the prime minister-in-waiting.
Some advisers warn against a kneejerk populist package, fearing tight fiscal constraints and anti-business rhetoric could hurt investment. However, voters will make the cost of living the primary issue regardless. “You can’t avoid the No 1 issue. You have to try,” says one insider. Polling shows an “economic populist” approach would help Labour retain its majority against Reform UK. If the backdrop improves as hoped, Burnham could take advantage.
