The City is bracing for a reshuffle at the top of Labour’s economic command. Andy Burnham, the Greater Manchester Mayor, is now being tipped as the next Chancellor of the Exchequer, replacing Rachel Reeves in a move that would mark a significant shift in fiscal policy direction. The news, which broke late yesterday, sent gilt yields twitching and sterling sliding as traders reassessed the probability of a more interventionist, big-spending Labour government.
Let’s be clear about what this signals. Reeves, despite her occasional wobbles, has been a hawkish voice on fiscal responsibility. She has insisted on balancing the books, even if that meant forgoing popular spending pledges. Burnham, by contrast, is a tribal Keynesian. He believes in the state’s capacity to borrow cheaply and invest heavily. He would likely ramp up infrastructure spending, devolve more powers to regions, and potentially tear up the fiscal rules that have kept the bond market market calm.
The immediate market reaction was telling. The yield on the 10-year gilt spiked 12 basis points as the story broke. The pound lost half a cent against the dollar. This is not a market that trusts Burnham with the nation’s credit card. And why should it? His track record is of big promises and bigger budgets. The Grayling Report on transport spending in the North West showed that Burnham’s proposals would require an additional £15 billion in borrowing over five years. That’s real money, and it would come at a time when the national debt is already eyeing the 100% of GDP mark.
But the political calculus is more complex. Labour insiders say the leadership is worried about the upcoming general election. The polls are narrowing, and the Conservative attack lines on Labour’s economic competence are hitting home. Reeves, for all her discipline, is not a charismatic campaigner. Burnham, with his everyman charm and visceral connection to the northern working class, is seen as a antidote to the Metropolitian elite image that plagues the party.
The risk, however, is that the medicine poisons the patient. Capital flight is a real concern. If the markets detect a shift towards unfunded spending, investors will demand higher yields to hold UK debt. That would push up mortgage rates, crowd out private investment, and eventually force a painful austerity of its own. The International Monetary Fund, in its latest Article IV consultation, warned that the UK’s fiscal credibility is already fragile. A Chancellor Burnham would be testing that fragility to its limit.
Let’s also consider the reaction of the Bank of England. Governor Bailey has walked a tightrope between taming inflation and supporting growth. A profligate chancellor would make his job exponentially harder. He would likely have to raise interest rates faster and further to offset fiscal stimulus. That would chew up consumer spending and housing market. The housing market, already shaky after the mini-budget disaster, would take another blow.
The City’s fear is that Labour under Burnham would repeat the mistakes of Truss’s mini-budget: unfunded tax cuts or spending pledges that spook the bond market. But Burnham is no Truss. He is a seasoned politician who understands the need for a narrative. He would frame his spending as investment, not giveaways. He would talk about levelling up, about repairing the social fabric, about generational change. That might sell in the pub and on the doorstep, but it won’t sell in the bond market. The bond market is a cold, calculating machine. It does not care about big ideas. It cares about cash flows and debt sustainability.
So where does this leave the smart money? It leaves it hedging. Shorting gilts, buying swaps, and pouring into gold. The gold price inched up yesterday, reflecting a flight to safety. The winners of this power shift, if it happens, will be the long-suffering holders of inflation-linked bonds. And the losers? The taxpayer. Because ultimately, when the music stops, it’s the taxpayer who is left holding the tab for the politicians’ ambitions.
Burnham’s rise is not yet certain. There are still party rules to navigate, and the left wing of Labour is wary of his centrist tendencies. But the momentum is with him. And if he does get the keys to Number 11, the City should brace for a very different fiscal regime. One where the bottom line is not the deficit, but the ballot box.
