Better news on inflation might lower bond yields regardless of the changes in Downing Street. But it seems more likely that honeymoon disappointment and Budget speculation will sap confidence further.
This Friday, Andy Burnham is set to be confirmed as the new leader of the Labour Party and hence as the next Prime Minister of the UK. But we still know remarkably little about what a Burnham premiership would mean in practice.
The immediate risk is that any honeymoon period will be brutally short. Burnham’s approval ratings are already starting to wobble. For someone who has been planning to run for at least a year, he seems astonishingly unprepared and has already flip-flopped on many of his previous positions.
Burnham may be a better communicator than Starmer, but that is not a high bar, and he has not yet had the confidence to face any serious questioning. Most agree that he failed to impress when he was a cabinet minister back in the Brown government.
The PM-in-waiting has at least sketched out some broad principles. He has trumpeted the case for devolving more powers from Westminster to the regions; building more council homes; ramping up infrastructure spending; bringing utilities under closer public control; and making more use of government procurement as part of an increasingly activist “industrial strategy”.
But this wish list still raises more questions than it answers, including what this might all mean for government borrowing and taxation.
Burnham has also promised to end “neo-liberalism” and “trickle-down economics”, without satisfactorily defining either of these terms. In reality, the size and reach of the state has been expanding for many years – a trend which simply accelerated under Starmer. Burnham looks set to take the country even further to the left.
Burnham’s flagship policy will presumably be “devolution”. This is of course a nod to his record as Mayor of Greater Manchester, which coincided with a period of relatively rapid economic growth in the region. Burnham was an effective voice for Manchester on the national stage and made the most of his devolved powers, notably in supporting private construction projects.
But Manchester was arguably a special case. Growth was flattered by local factors including the development of two Premier League clubs, the new BBC studios, and the expansion of university education. Despite this, the benefits of the central Manchester property boom were not widely felt.
The upshot is that the Manchester “success story” will not be easily replicated elsewhere. The record of many other regional mayors is less impressive, and Scotland and Wales are hardly poster children for increased devolution.
The key problem is that simply changing the people making the decisions – or moving some of them to a new “No.10 North” – will not change the economic fundamentals, or the financial constraints.
Moreover, securing more central government funding for your city is one thing. Running a nationwide budget with major tax and borrowing powers is entirely another. Burnham’s limited and brief experience as Chief Secretary to the Treasury and at Health is only a little help here, not least because the public finances were then in much better shape.
Indeed, the financial constraints look set to become even tighter. A Burnham government will surely increase spending on infrastructure and especially on council housing, on top of the additional pressures to spend more on social care and defence.
The government may hope that the markets will be more tolerant of borrowing to finance investment and the accumulation of assets, rather than simply to pay for day-to-day spending. But this also begs a lot of questions, including the compatibility with the existing fiscal rules (which Burnham has indicated he will keep) and how these measures will be scored by the independent Office for Budget Responsibility (OBR). Investor confidence in UK assets is already low and Burnham will be starting from scratch.
This suggests that more of the money for additional spending will have to come from tax. There has been much speculation that Burnham will prioritise another big increase in Capital Gains Tax, perhaps equalising it with income tax. But most independent experts agree that there is little scope to raise more money this way. Importantly, both the OBR and the Treasury will push back strongly too.
This emphasis is more likely to be on other capital and business taxes, especially those on property. This would fit Burnham’s regional agenda too, as most of the additional burden would fall on London and the South East.
Little may change in some policy areas – even those where change is sorely needed. There still seems to be little to no appetite for fundamental reform of welfare spending or the NHS, or for any unwinding of the additional red tape which is now tying up the labour market.
There are still plenty of other unknowns. Much may depend on Burnham’s pick as Chancellor. Wes Streeting might be most likely to embrace serious structural reform, while Pat McFadden might be tougher on welfare. However, Ed Miliband is still a frontrunner.
Promoting Miliband to the Treasury would make it even harder to row back on some of the madder “green” policies, while increasing the chances of further attacks on business and wealth creation.
Relations with the EU are another potential flashpoint. Burnham, Streeting and Miliband have each supported the reversal of Brexit to varying degrees. But multiple polls show that any popular support for reversing Brexit crumbles once voters are presented with the costs and conditions of EU membership. It would certainly be odd to hand more decision-making powers back to Brussels at the same time as favouring more devolution at home.
Burnham might still be lucky. Some better news on inflation could ease the upward pressure on bond yields, regardless of the changes in Downing Street (both in No.10 and No.11). A handful of surveys already suggest that the labour and housing markets may be levelling out, and they could both start to recover if uncertainty eases.
The new PM will also still have up to three years before the next general election, allowing him more time to develop proper longer-term plans – including for defence and social care, and for fundamental reforms of capital and business taxes.
But the risks could also come to a head much sooner. There is now talk of a blockbuster Budget in the Autumn, combining big tax increases with a spending review. This threatens a repeat of the harmful pre-Budget speculation that unnerved investors and damaged the economy under Rachel Reeves.
Burnham’s honeymoon could then be over almost before it has begun, and the nation would be left footing the bill for the crash that follows…
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