Andy Burnham is preparing to take office as prime minister amid significant economic headwinds, including elevated borrowing, national debt at its highest since the 1960s, weak growth, and rising demands for spending on defence, net zero, and an ageing population. He has committed to a 'new direction' for Britain but has pledged to stick to Labour's current fiscal rules under pressure from bond markets.
Recent market relief offers some breathing room
Recent developments have provided some relief. The global oil price has fallen back to levels last seen before the outbreak of the US-Israeli war on Iran, dipping to $72 a barrel amid hopes of a ceasefire holding. Some analysts forecast it could fall to $60 by the end of the year. As a result, inflation risks are fading, easing pressure on central banks to hold interest rates at elevated levels. Financial markets have rallied and government borrowing costs have fallen from recent highs, including in the UK.
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 analysts at Capital Economics estimate inflation closer to 3.5% and GDP growth of 1%. They expect the Bank of England could cut interest rates from 3.75% to 3% next year.
Fiscal headroom improves but remains tight
As recently as May, analysts at Bank of America had estimated the £23.6bn of 'headroom' Rachel Reeves had left against the main fiscal rule in the spring had been reduced by about £10bn by the Iran war. Now it estimates a hit of about £4.6bn. Others predict little or no impact at all. However, Burnham will need more than just a stroke of luck to fix the long-term challenges facing the economy, and the capacity for a leftfield shock remains high, not least with the most unpredictable US president of the modern age in the White House.
Council housebuilding and cost of living promises
A council housebuilding boom is central to Burnham's vision. However, his promise of higher spending on council housing, infrastructure, and cost of living support will not come cheap. A Burnham government would probably need to consider tax increases, yet he has also committed to Labour's 2024 manifesto promise not to increase taxes on work, which are among the biggest revenue-raisers.
Keeping some degree of headroom is seen as important to assuage City concerns. With the unfunded defence investment plan left by Keir Starmer – £4.7bn over four years – Burnham will start on the back foot.
Internal debate over timing and approach
There is a lively debate within Burnham's camp over the appropriate mix of caution and radicalism, and the timing of any cost of living package: as quickly as possible, or alongside a budget in the autumn? Insiders say there is a desire to avoid the drawn-out tax speculation seen between Labour's July 2024 landslide and Rachel Reeves's first budget four months later. '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 of Burnham's advisers are warning him against launching a kneejerk package of populist cost of living measures, fearing the tight constraints on the public finances and impact anti-business rhetoric could have on 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 taking an 'economic populist' approach would also help Labour retain its majority in a fight against Reform UK.
If the backdrop improves as hoped, the prime minister-in-waiting could take advantage, but times are still hard and Burnham needs to act fast with the clock ticking on the next general election.
