On Wednesday, Andy Burnham took steps to stabilize the turbulent bond markets as rising borrowing costs posed a significant risk to his administration’s upcoming budget, scheduled for next month. Following several days of a sell-off in government bonds, which left Chancellor John Healey facing a potential reduction in spending capacity, Burnham utilized his initial appearance at Prime Minister’s Questions (PMQs) to assure that future decisions would remain “grounded in fiscal responsibility.”
This statement was largely perceived as a move to reassure investors after Burnham’s bold declarations to Parliament the previous day, which included plans for increased public control over utility services, additional measures to address the cost of living, and a reaffirmation of a commitment to a 3% rise in defense expenditure. While these proposals garnered support from Labour members, they also attracted criticism from some quarters, including Burnham’s former economic advisor, Jim O’Neill, who remarked that such statements were “the last thing” the markets required at that moment.
Globally, investors have been offloading government bonds amid concerns over escalating inflation and soaring deficits, compounded by high demand for capital from technology firms engaged in a spending surge related to artificial intelligence. This exodus has resulted in increased yields, or interest rates, including in the UK, where the cost of 10-year government borrowing reached its highest level since 2008 at 5.29% on Wednesday, before retracting slightly.
This increase in borrowing costs is likely to create challenges for Chancellor Healey as the Office for Budget Responsibility prepares its budget forecasts. The independent agency bases its yield projections on a snapshot of market interest rates that is taken weeks in advance of each budget, with the relevant data expected to be gathered soon for Healey’s statement on October 28.
Healey has consistently emphasized that fiscal discipline remains the foundation of government policy. He is scheduled to deliver a speech on Monday outlining his economic growth strategy, following a similar address by his predecessor, Rachel Reeves, less than six months ago.
During his first PMQs confrontation with Kemi Badenoch, Burnham attributed the current market instability to the Conservative party’s past governance. Badenoch criticized Burnham’s lengthy Commons statement the day prior, claiming he did not reject any spending requests and suggested that while pleasing everyone is commendable, true leadership requires making difficult decisions.
Burnham responded by stating that his budget would adhere to fiscal guidelines while also addressing the cost of living challenges faced by the public. Analysts have indicated that rising interest rates on public debt could potentially eliminate up to half of the £24 billion buffer that Rachel Reeves had established against Labour’s fiscal regulations.
Government insiders expressed concerns to the Guardian about Healey’s ability to present a budget with less than double-digit fiscal headroom, as this would send a negative signal to bond markets. However, such a budget would leave little room for additional expenditure. Sources from Downing Street refrained from commenting on Burnham’s desired level of fiscal headroom.
Additionally, Healey must outline how the Treasury plans to address the funding shortfall in defense spending and finance Burnham’s cost of living initiatives, which include a VAT reduction on electricity bills. Helen Miller, director of the Institute for Fiscal Studies, noted that debt interest now accounts for one out of every £12 the government spends, meaning even minor adjustments could have significant implications.
Miller also pointed out two other budgetary challenges for Healey: a potential downgrade in growth forecasts due to decreasing immigration and increased demands for defense spending. She remarked, “Individually, none of these factors are a cause for alarm, but collectively, they exert substantial pressure on the government.”
Ruth Curtis, director of the Resolution Foundation, underscored that the volatile markets would likely result in heightened scrutiny of the government’s public finance sustainability. She commented that while the risks of not addressing these challenges have increased, so too have the potential rewards for demonstrating a commitment to fiscal responsibility.
Curtis supported O’Neill’s suggestion for the government to consider eliminating the triple lock on pensions as a signal of its seriousness about fiscal balance. O’Neill, who had previously been mentioned as a potential economic advisor to Burnham, has instead publicly critiqued the nascent government.
A Treasury official asserted that, unlike other major economies such as the US, the UK has a plan—handed down from Reeves—for reducing the deficit and managing debt. They stated, “If investors begin scrutinizing fiscal strategies, we should aim to differentiate ourselves positively.”
The global market unease has been exacerbated by rising oil prices following renewed conflict in the Middle East, leading to heightened inflation expectations. Investors now anticipate that the Bank of England may raise interest rates three times over the next year, reaching 4.5%, to combat inflation, which could further increase mortgage expenses just as Burnham aims to alleviate the cost of living.
On Thursday, Burnham is expected to host French President Emmanuel Macron at Downing Street, marking the beginning of efforts to cultivate relationships with European allies as the UK continues its recalibration with the EU. The Prime Minister is likely to use this meeting to advocate for deeper cooperation with Europe to bolster British businesses and stimulate economic growth, with Macron being a pivotal figure in the government’s pursuit of a closer trading relationship.
