Victory in Makerfield Boosts Burnham’s Path to No 10
Andy Burnham’s decisive win in the Makerfield by-election passed without triggering the bond market turmoil that Rachel Reeves’s supporters had anticipated. However, as Burnham advances towards the premiership, it is crucial for him to communicate clearly about taxation and spending, acknowledging that not all promises can be fulfilled without consequences.
The yield, or interest rate, on UK government bonds rose slightly on Friday, but the increase was modest. This relative stability was partly because a Burnham victory was already factored into market expectations, and because he publicly committed to adhering to Reeves’s budgetary rules. Additionally, favorable inflation data earlier in the week alleviated concerns about the Iran war’s impact on living costs, contributing to lower yields.
Going forward, every statement from Burnham and his prospective chancellor will be closely scrutinized by financial markets. If his administration intends to increase borrowing substantially, as Reeves’s rules permit when acquiring financial assets like shareholdings, the government’s balance sheet could remain stable. The rationale is that new liabilities to bondholders are balanced by assets generating financial returns.
However, bond markets may be skeptical if Burnham’s government cannot demonstrate a sustainable plan for day-to-day expenditures such as pensions, benefits, and public services. During the brief Makerfield campaign, Burnham showed little indication of such a plan. He considered supporting Waspi women, an idea that was
“a bit of a fudge,”and expressed opposition to Reeves’s rise in employer national insurance contributions (NICs), which generate £25 billion annually.
Burnham also proposed halving VAT for the struggling pub industry, despite the sector’s challenges being partly due to declining patronage, which is not attributable to Reeves’s policies. Concurrently, he pledged to uphold Labour’s manifesto promise to maintain the pensions triple lock throughout this parliament and to avoid raising income tax or NICs on workers—commitments that previously led Reeves to increase employer NICs instead.
He further aims to reduce utility bills. While increased public ownership might eventually lower bills by removing shareholder profits, current water bills are regulated by Ofwat to cover significant investment needs. Regarding electricity, some measures similar to Reeves’s December decision to shift certain consumer levies to general taxation could be pursued, but funding these costs would require alternative sources.
Spending Constraints and Defence Funding Challenges
Burnham’s broad promises come amid tight spending plans already outlined by Reeves for the latter part of this parliament and a looming dispute over defence funding. John Healey resigned over Starmer and Reeves’s choice not to fully finance the defence investment plan, which allocated £13 billion of the £18 billion requested by 2030, achieved by reducing capital budgets in other departments. Burnham and his chancellor will need to decide promptly whether to allocate additional resources to the Ministry of Defence in coming years and determine how to finance such increases.
Tax Options Beyond Manifesto Limits
There are potential tax increases that would not violate Labour’s manifesto pledges. For instance, Burnham could follow Reeves’s example by raising capital gains tax again, impose the bank tax she considered but did not implement, and adjust the planned "mansion tax" on high-value homes set for 2028. Introducing a wealth tax could also signal strong intent, though practical challenges exist.
Spending Adjustments to Reassure Markets
On the expenditure side, abolishing the triple lock would be a significant step if Burnham and his chancellor wish to assure bond markets of fiscal responsibility. Originally introduced to combat pensioner poverty, the triple lock has coincided with pensioners’ living standards rising three times faster than other groups over the past two decades, with pensioners no more likely to experience poverty than non-pensioners, according to the Resolution Foundation’s Ruth Curtice. A smoothed earnings increase, where the state pension tracks earnings except during periods of rapid inflation, would be fairer, more predictable, and save billions over time.
While economic policy should not be reduced solely to tax and spending debates, only by presenting clear and realistic fiscal plans can a chancellor calm market volatility and create room for broader policy initiatives. Labour has spent much of the past two years hindered by speculation about tax increases. Markets dislike uncertainty, and so do businesses and consumers, whose decisions influence the economic trajectory.
With the Iran war’s economic effects expected to persist for months, the UK economy cannot afford another summer of stagnation or a bond market selloff that would raise interest rates and increase costs, thereby undermining Burnham’s broader objectives.
