Andy Burnham has taken office as the UK's Prime Minister, making a surprise appointment of John Healey as Chancellor of the Exchequer instead of the widely anticipated Shabana Mahmood. His initial policy move was to scrap VAT on household electricity bills for at least six months starting in October, aiming to save the average household approximately £45 per year. This policy, which will cost about £36 billion annually, or £500 per person in the UK, is intended to alleviate the cost-of-living crisis and was reportedly funded by canceling plans for a digital ID system.
Burnham's government faces significant financial challenges, with government debt exceeding 95% of GDP and debt interest payments reaching £111.2 billion in the last fiscal year. Financial markets, particularly the bond market, are wary of unfunded spending, with UK government bond yields (gilts) trading at a significant premium compared to Italian and German equivalents. Analysts suggest that elevated gilt yields contribute to higher mortgage costs in the UK, potentially making an average UK mortgage £2,050 a year more expensive than an equivalent Italian mortgage.
The appointment of John Healey, who has experience in the Treasury under Gordon Brown, is seen by some as an attempt to reassure investors that the government will prioritize debt reduction. However, his task is daunting, as the UK economy has grown at less than 1.5% annually since 2009. The government's policy to cut VAT on electricity bills, while popular with voters, has raised concerns among economists about the long-term impact on Britain's fiscal credibility and the potential for higher borrowing costs offsetting any savings for households.
Burnham's swift actions indicate a desire to move quickly, but he faces pressure to balance voter demands for relief with market expectations for fiscal prudence. The government is committed to reducing debt, with the VAT cut reportedly funded by other cancellations, but the Institute for Fiscal Studies has estimated the cost of the policy. The larger challenge for Burnham and Healey is to find ways to reinvigorate the slow-growing economy and increase government revenue without undermining financial stability, a problem that has plagued predecessors.
