Burnham shifts tone on fiscal rules amid bond market pressure

Andy Burnham has long faced a narrow path to replace Keir Starmer as prime minister, navigating a tricky byelection, an undeclared leadership contest and a bond market backdrop that is far from constructive.

In making his pitch, the Greater Manchester mayor has found himself dancing on a pin to assuage City investors in particular.

Since warning last year that Britain was too “in hock” to the bond markets, the bookmakers’ favourite to succeed Starmer has toned down his rhetoric, suggesting at the weekend that he supported the government’s current fiscal rules and would have a plan to reduce debt.

By their nature, the rules — self-imposed limits on borrowing and debt — are a straitjacket worn by successive administrations to reassure those in the £2.9tn market for UK government debt that Britain is a safe bet.

“I have never said you can just ignore the bond markets,” he told ITV. “I said that politicians have placed Britain in hock because of the way in which we lost control of our finances and public spending.”

Amid febrile conditions in global markets, Burnham’s change in tack is understandable, as the UK’s borrowing costs have risen sharply along with those of other advanced economies in the fallout from the Iran war.

Primarily, the rise in the yield — effectively the interest rate — on the UK’s long-term borrowing to its highest levels since 1998 reflects the impact of higher inflation and the expectation that the Middle East war will hit growth more than elsewhere in the G7.

However, investors also take the view that a leadership fight is bad for business and that a Starmer replacement would likely add to borrowing, compounding political instability in a country contemplating its sixth prime minister in seven years.

Against this backdrop, Burnham’s “in hock” comments and talk of a radical policy agenda — involving the renationalisation of energy and water — have put him at a disadvantage in the City, where investors relatively favour keeping Starmer and Chancellor Rachel Reeves for their apparent readiness to burn political goodwill to balance the books.

Of course, the bond market has no vote in the Labour leadership contest, and the party’s members and the needs of the country at large are more important, but there is also recognition that it cannot be entirely ignored.

On Monday, the International Monetary Fund signalled that whoever holds power in Britain, regardless of political party, would need to face up to the “economic realities” of debt levels close to 100% of GDP and the general rise in borrowing costs for governments worldwide.

Britain has “limited fiscal space” to do things differently, the Washington-based fund said, warning that with investors watching closely, adding to already elevated borrowing levels could risk provoking a debt spiral where rising debt costs add further to borrowing while squeezing out capacity to spend on other priorities.

Within Labour ranks, the memory of Liz Truss’s short-lived premiership remains fresh after the surge in borrowing costs for mortgage holders and businesses that the bond market backlash to her mini-budget provoked.

In Burnham’s policy circles, the view is that Reeves’s fiscal rules — despite representing adherence to bond market discipline — could only be overhauled from a position of strength.

However, the idea is that Labour has more scope to tweak its tax and spending positions than is being utilised, should Downing Street be willing to make the case.

So far, that has been reflected in Burnham’s tone as well as some policy suggestions yet to be fleshed out in detail, such as an idea to increase borrowing outside the fiscal rules to allow for a rise in defence spending.

As the Labour leadership fight intensifies without a big shift in the global backdrop, Britain’s bond market constraints could mean Burnham continues with a more pragmatic stance: not quite in hock, but not footloose either.