Andy Burnham, the anticipated next Prime Minister of the UK, plans to pursue "flexibility" within the government's spending and borrowing rules, an indication that he may diverge from the fiscal strategy implemented by current Chancellor Rachel Reeves. Richard Leese, former deputy mayor of Greater Manchester under Burnham, stated in a Bloomberg Radio interview that Burnham would look for more adaptable application of these rules to foster economic growth. Leese emphasized that without economic growth, fiscal rules would increasingly strain the government's ability to operate.
This approach suggests a potential shift from the current stringent fiscal framework. Notably, Burnham will inherit roughly $16 billion in additional borrowing room by autumn, a result of changes to the fiscal framework initiated by outgoing Chancellor Rachel Reeves. This buffer could help mitigate any negative impacts from worsening Office for Budget Responsibility forecasts, especially concerning higher borrowing costs and revised, lower migration assumptions, as highlighted by ING Economics.
Burnham's ambitions, which include investments in social housing and various nationalization plans, are currently constrained by his commitment to existing fiscal rules and a pledge not to increase major taxes such as income tax, national insurance, and value-added tax. He is also committed to the state pension's "triple lock" until after the next election. However, ING suggests that changes to the fiscal rules themselves, like exempting defense spending, might be inevitable in the coming years, even if not anticipated in 2026. The financial markets have so far reacted calmly to Burnham taking office, with most bond investors not expecting significant immediate disruptions, though long-term concerns about fiscal trajectory persist.
Despite these constraints, ING identified areas where Burnham could make surprising moves. These include capital investment, particularly through regional housing banks and increased use of the National Wealth Fund, which could flatter fiscal rules by creating financial assets. Other potential areas include tax reforms, such as adjusting the income tax-free allowance (currently frozen at $12,570), which would cost $11 billion annually if raised, and welfare reforms like changes to the state pension's triple lock. Additionally, reform of property taxes, such as stamp duty or council tax, is still contentious, with initial efforts possibly focusing on expanding the "mansion tax" from 2028. For now, the base case is a budget focused on eye-catching but inexpensive policies, such as cutting bus fares, lowering hospitality taxes, and shifting some policy costs from electricity bills to general taxation, costing a few billion dollars.
