Andy Burnham’s thumping victory in the Makerfield byelection came and went without the bond market rout that Rachel Reeves’s backers had warned about. But as he moves towards the premiership, Burnham would be wise to set clear expectations about tax and spend, and to be upfront about the fact that not everyone can be a winner.
The yield, or interest rate, on UK government bonds did move up on Friday, but only modestly. That relative calm was partly because a Burnham win was already priced in, and because he took out the insurance policy of loudly promising to stick by Reeves’s budget rules.
His timing was also lucky: better-than-expected inflation figures earlier in the week eased market concerns about the Iran war’s impact on the cost of living, which has helped to bring yields down.
But Burnham’s every pronouncement – and that of whoever he picks as chancellor – will now be watched intently by the markets.
If his team are serious about nationalisation of key utilities, they may well want to borrow significantly more – something Reeves’s rules allow for, where the government gets a financial asset, such as a shareholding, in return.
The logic is that the nation’s balance sheet has barely changed if it takes on a new liability to bondholders but that’s matched with something that generates a financial return.
The bond markets may be wary of taking such a laid-back view, however, if a Burnham government cannot show that when it comes to day-to-day spending – pensions, benefits, public services – it has a plan to make ends meet.
He showed little sign of having a plan in the brief Makerfield campaign. Burnham mused about helping Waspi women – an idea that was hastily rescinded. He said he wasn’t a fan of Reeves’s rise in employer national insurance contributions (NICs), which brings in £25bn a year.
He said he would quite like to halve VAT for the ailing pub industry (whose travails, let’s face it, are partly caused by the fact people are going to the pub less, which is hardly Reeves’s fault).
At the same time, he has said he will stick by Labour’s manifesto promise to maintain the pensions triple lock for this parliament and honour the pledge not to raise the income tax or NICs on workers – which forced Reeves down the path of picking employer NICs in the first place.
He wants to cut utility bills, too. Greater public ownership may eventually drive bills down, once shareholders and their profits are out of the picture. But for the moment water bills are already set by the regulator, Ofwat, to take into account the huge investment the sector needs.
On electricity, there is probably more to do along the lines of Reeves’s decision last December to shift some of the levies that are loaded on to consumers back on to general taxation – but the costs of doing that would have to be found from somewhere.
Burnham’s broad hints at largesse come against the backdrop of worse-than-expected public borrowing figures; with eyewateringly tight spending plans already pencilled in by Reeves for the back end of this parliament; and with a row looming over defence.
John Healey resigned over Starmer and Reeves’s decision not to fund fully the defence investment plan – allocating £13bn of the £18bn he had asked for by 2030, and then only by salami-slicing the capital budgets of other departments. Burnham and his chancellor will rapidly have to decide whether to make more resources available to the Ministry of Defence in the coming years – and if so, how that will be funded.
There are options for tax increases that don’t step on the live wire of Labour’s manifesto pledges. Burnham could follow Reeves’s lead and raise capital gains tax again, for example; impose the bank tax she flirted with but ditched after City lobbying; and tinker with the “mansion tax”, on high-value homes, due to come into force in 2028.
Announcing a wealth tax would be a powerful symbol of intent, too, though the practicalities are challenging.
On the spending side, scrapping the triple lock would be a great place to start, if Burnham and his chancellor want to show bond markets they mean business. It was brought in to tackle pensioner poverty but, as the Resolution Foundation’s Ruth Curtice pointed out recently, pensioners have seen their living standards rise three times faster than other groups over the past 20 years, and are no more likely to be in poverty than non-pensioners.
Some form of smoothed earnings uplift, where the state-pension tracks earnings except when inflation races ahead, would be fairer, more predictable and, over time, would save billions.
Of course, it is a mistake to reduce economic policy to a dry debate about tax and spend. But it is only by setting out clear and realistic plans for fiscal policy, that a chancellor can quieten the market noise, and make the space for everything else.
Labour spent the latter half of the past two years stymied by speculation about tax rises. Markets are not fans of uncertainty; businesses and consumers aren’t either – and their myriad decisions can set the economic agenda.
With the impact of the Iran war likely to continue being felt for months, the economy can ill afford another summer of stasis, let alone a bond market selloff that would drive up interest rates and raise the cost of everything else Burnham wants to achieve.