Andy Burnham, a leading contender for UK Prime Minister, has signaled a clear direction for his potential government's economic policy by committing to existing fiscal rules.
This move was primarily aimed at calming financial markets, which had become unsettled. When Mr. Burnham's path to power seemed more likely around May 15, the value of UK government bonds, known as 'gilts', fell sharply. This indicated that investors feared his leadership might lead to looser spending and more borrowing. However, his team's subsequent pledge to stick to the current rules on debt and borrowing caused both gilts and the pound sterling to recover, as markets priced in a lower risk of fiscal indiscipline.
At the heart of this decision is a classic trade-off between fiscal credibility and policy space. By promising to adhere to strict borrowing limits, Burnham gains the trust of investors, which is crucial for keeping the country's borrowing costs low. But this promise ties his hands, limiting his ability to borrow money to fund public services or new projects, such as building council houses.
This leads to a clear causal chain. First, the negative market reaction forced Burnham to signal stability. Second, with borrowing for day-to-day spending off the table, the only way to raise significant funds is through taxes. Third, since he deliberately avoided recommitting to the previous manifesto's 'big four' tax pledges—no rises in income tax, National Insurance, VAT, or corporation tax—he has left the door open for alternative revenue streams.
This path seems even more likely given the broader context. The UK is already carrying a high level of debt, and international bodies like the IMF have warned that there is little room to raise more revenue without deeper structural reforms. Therefore, instead of broad-based tax hikes that affect everyone, Burnham's government may be more inclined to explore targeted measures on wealth, property, or by closing specific tax loopholes. This strategy would allow him to raise funds while navigating the tight constraints he has embraced.
- Fiscal Rules: These are self-imposed constraints on government spending and borrowing, designed to ensure public finances remain sustainable. For example, a rule might state that national debt must be falling as a percentage of GDP by a certain year.
- Gilts: The name for bonds issued by the UK government. They are called 'gilts' because the original certificates had gilded edges. The yield on these bonds is effectively the interest rate the government pays to borrow money.
- Sterling: The official name for the currency of the United Kingdom, also commonly known as the pound (£).