Resume af teksten:
To måneder efter frygt for Andy Burnham som ny premierminister har hans ankomst til Downing Street mødt en afdæmpet reaktion fra markederne i Storbritannien. Investorer forventer ikke store ændringer i år, på trods af bekymringer om den langsigtede økonomiske kurs. Burnham planlægger at følge finansielle regler uden at hæve de største skatter. Budgettet til efteråret forventes at være beskedent med fokus på omkostningseffektive og enkle politikker, såsom reduktion af buspriser. Udfordringer fra tidligere administrationer, som nedskæringer i offentlige afdelinger og ufinansierede forsvarsplaner, forbliver uløste. Der er mulighed for større overraskelser i budgettet, men detaljer om Burnhams økonomiske planer er sparsomme. Muligheden for et hurtigt valg nævnes som en potentiel usikkerhedsfaktor.
Fra ING:
Two months ago, UK markets recoiled at the prospect of new Labour leader Andy Burnham becoming prime minister. Today, his arrival in Downing Street has been met with little more than a shrug.
Risk premium in the bond markets looks contained. Most investors I speak to don’t expect him to rock the boat this year, even if there are concerns about the fiscal trajectory further ahead.
That thinking is understandable. Burnham’s bold ambition towards everything from social housing investment to nationalisation is constrained by a commitment to stick to the fiscal rules and not raise the biggest taxes.
That tentatively points towards a relatively modest Autumn Budget. Expect a focus on policies that are as eye-catching as they are cheap and simple to implement.
Talk of plans to cut bus fares and lower taxes for hospitality is a case in point. As are proposals to shift a further share of policy costs from electricity bills onto general taxation, at a cost running into the low billions. That would conveniently coincide with a likely fall in the regulated energy price cap in October and would help push headline inflation lower at a time of heightened Bank of England sensitivity to price pressures.
Admittedly, those demands will run up against some thorny, unresolved issues from the Starmer era. Like the steep real-terms cuts to unprotected government departments planned for 2029, which will likely cost around £6bn in that year to reverse. Or the £4.7bn left unfunded in the recently announced Defence Investment Plan.
But the truth is the numbers here are not huge – and can be accommodated in the fiscal rules. Burnham can thank outgoing Chancellor Rachel Reeves, whose long-planned changes to the fiscal framework are set to create roughly £16bn of additional borrowing room this autumn against the current budget rule. That should help offset some of the deterioration in the Office for Budget Responsibility’s forecasts stemming from higher borrowing costs and lower migration assumptions.
Tax increases wouldn’t necessarily need to be dramatic, either. Reeves considered a smorgasbord of tax hikes last autumn, many of which went unused – not least because they typically raise little cash and present major trade-offs. But together a handful of measures – covering banks to pensions – could help finance a modest fiscal easing.
In short: some extra spending, some tax rises, a modest increase in borrowing – but not enough to reverse a steep fall in gilt issuance this year. The Debt Management Office expects to issue £246bn of bonds, down from £304bn in the last fiscal year. Britain is a rare example of an economy going through genuine fiscal tightening right now, a consequence of the ongoing freeze in tax thresholds.
This scenario isn’t likely to change our call for the Bank of England to start cutting rates again in 2027.
So far, so boring. So how could Burnham surprise markets this autumn?
A boring budget doesn’t win elections – nor does it square with Burnham’s rhetoric about big change. So a much bolder budget clearly can’t be ruled out. Uncertainty is high; detail on the new prime minister’s budget plans is light.
Don’t forget that everyone expected Starmer’s first budget to be dull. Then it ended up containing the biggest fiscal stimulus outside the pandemic since 2010.
Similar fireworks could come in five areas:
First, CapEx. Burnham wants to go big on social housing, but that’s difficult under a rule dictating that net financial debt must start falling within three years. But the word “financial” is key; investment that involves an equity stake or loan would be treated more favourably, because they create financial assets as well as liabilities.
It’s why we’re hearing about new regional housing banks to finance social housing, or greater use of the National Wealth Fund to support infrastructure. Yet while these investment vehicles flatter the fiscal rules, they still usually require some upfront cash and therefore higher issuance – which ultimately is what markets are interested in. Thames Water and the push for greater public control will be an early test of ambition in this area.
Second, welfare reform. This is seen as totemic by many investors, even if the scope for material savings is very limited. Welfare spending accounts for a growing share of government expenditure. But Starmer’s efforts to cut disability and pensioner benefits sparked huge backlash. Burnham has given little sign he wants to pick a fight over the Triple Lock, which sees the State Pension rise by the higher of inflation or earnings growth. But a surprise push here might be rewarded in lower gilt yields.
Third, tax reform. Property taxes aren’t working – virtually everyone accepts that. And Burnham has indicated reform here will be a key focus. Proposals tend to focus on stamp duty – which is paid by buyers and is seen as a brake on housing transactions – and council tax, which is levied based on a property’s value in 1991. This has become a key focus for proponents of a wealth tax.
Yet reform would be hugely contentious. What if you’ve just bought a house and risk being taxed twice? Revaluing council tax would also create huge winners and losers – but without necessarily raising any fresh cash. A lot of controversy for not much gain under the fiscal rules, with an election slowly coming into sight? It’s why most expect efforts here to start with a further expansion of the so-called “mansion tax” being levied from 2028.
Then – fourth – there’s tax more broadly. Reports this weekend hint that Burnham is open to raising the tax-free allowance for workers, a move that wouldn’t come cheap. A 10% increase in the allowance, which has been frozen at £12,570 since 2021, would cost £11bn per year according to Treasury calculations .
Much depends on the size of any increase and how it might be funded. Burnham might be drawn to the Resolution Foundation’s proposed “tax switch”: a 2ppt cut in National Insurance offset by a 2ppt rise in income tax. Because income tax has a broader base, this would raise about £6bn a year while leaving employee tax bills largely unaffected.
But even if the cost were mitigated, markets still probably wouldn’t react kindly. Remember the freeze in tax thresholds is a major driver of lower borrowing this year and projected deficit reductions in the years ahead. Reversing course would cast doubt on the Treasury’s commitment to those plans.
It would also shine a light on the combined income tax and National Insurance burden on the average worker, which is among the lowest in Europe according to the OECD. That’s despite the UK’s overall tax burden being at its highest level in decades.
Without difficult decisions on those major taxes – and set against the cacophony of fiscal challenges coupled with Labour’s big ambitions – it’s hard to see how the Treasury avoids relying more heavily on borrowing in the years ahead.
That brings us neatly to the final source of surprise: changes to fiscal rules. To us, this looks inevitable over the coming years, even if the widespread assumption is that it won’t happen in 2026.
One option involves exempting defence spending or other investment from the fiscal rules entirely. The Treasury might fairly argue that investors would prefer that over borrowing on day-to-day spending. But more borrowing is more borrowing, however you look at it. And markets would react accordingly.
Remember, investors don’t care about the fiscal rules per se; they care about the level of issuance they imply.
But what if the surprise isn’t the budget at all?
A snap election is still the major wildcard. And markets probably wouldn’t like it.
On paper, it looks highly unlikely. Why risk losing Labour’s enormous 166-seat working majority at a time when the polls suggest the party would lose almost half its seats if an election were held tomorrow? Betting markets put the chances of a snap election at 15-20%.
Then again, Burnham won more than 50% of the vote in his new constituency of Makerfield a few weeks ago – a seat that would likely otherwise have been claimed by Nigel Farage’s Reform UK. If that sentiment spreads into the national polls, then it’s easier to see how Burnham might be tempted. Particularly when history tells us a new leader’s popularity rarely goes up and usually goes down over time.
It would fit a recent tendency of prime ministers to seek their own mandate. We saw it with Theresa May in 2017 and Boris Johnson in 2019. Yes, there are differences today (Johnson benefited from Brexit fatigue and Farage’s then-Brexit Party standing aside at the election). But Burnham’s team might also conclude his policy platform is only possible with a full five-year term to throw at it. It would almost certainly come at the cost of a smaller majority. But then we’ve seen with both Starmer and Johnson that huge landslides are no guarantee of eternal power within one’s own party.
None of this comes without significant risk. May lost the Conservatives their majority in 2017 despite entering the campaign in a strong position in the polls. That’s why an election is not our base case.
But the probability is perhaps higher than the betting odds imply. And a snap election probably wouldn’t be received well by investors – assuming it could imply bolder borrowing plans if Labour resecured a majority, and policy paralysis if it didn’t.
Kilde: ING, https://think.ing.com/articles/how-andy-burnham-could-surprise-uk-markets/
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