Andy Burnham has always faced a narrow path to replace Keir Starmer as prime minister: a tricky byelection, a leadership contest that is yet to be declared, and a far from constructive bond market backdrop.
In making his pitch, assuaging City investors in particular has led the Greater Manchester mayor to dance on a pin.
Since warning last year that Britain was too “in hock” to the bond markets, the bookmakers’ favourite to replace Starmer has toned things down – suggesting at the weekend that he supported the government’s current fiscal rules and would have a plan to get debt down.
By their nature, the rules – self-imposed limits on borrowing and debt – are a straitjacket worn by successive administrations to reassure those in the £2.9tn market for UK government debt that Britain is a safe bet.
“I have never said you can just ignore the bond markets,” he told ITV. “I said that politicians have placed Britain in hock because of the way in which we lost control of our finances and public spending.”
Amid febrile conditions in global markets, Burnham’s change in tack is understandable. Along with other advanced economies, the UK government’s borrowing costs have risen sharply amid the fallout from the Iran war.
Primarily, the rise in the yield – in effect the interest rate – on the UK’s long-term borrowing to the highest levels since 1998 reflects the impact of higher inflation on the UK, and the expectation that the Middle East war will hit growth more than elsewhere in the G7.
However, investors also take a view that a leadership fight is bad for business, and that a Starmer replacement would probably add to borrowing. In a country contemplating its sixth prime minister in seven years, many investors are weary of political instability.
Against this backdrop, Burnham’s “in hock” comments and talk of a radical policy agenda – involving the renationalisation of energy and water – have set him at a disadvantage in the City. Relatively speaking, investors favour keeping Starmer and the chancellor, Rachel Reeves, given their apparent readiness to burn political goodwill to balance the books.
Of course the bond market has no vote in the Labour leadership. The party’s members, and the needs of the country at large, are of more importance. But there is also a recognition that it cannot be entirely ignored.
On Monday the International Monetary Fund signalled that whoever holds power in Britain – regardless of political party – would need to face up to the “economic realities” of debt levels close to 100% of GDP and the general rise in borrowing costs for governments worldwide.
Britain has “limited fiscal space” to do things differently, the Washington-based fund said. With investors watching closely, adding to already elevated borrowing levels could risk provoking debt spiral dynamics, whereby the rising debt costs add further to borrowing while also squeezing out capacity to spend on other priorities.
Within Labour ranks the memory of Liz Truss’s short-lived premiership remains fresh, after the surge in borrowing costs for mortgage holders and businesses that the bond market backlash to her mini-budget provoked.
In Burnham’s policy circles, the view is that Reeves’s fiscal rules – despite representing adherence to bond market discipline – could only be overhauled from a position of strength.
However, the idea is that Labour has more scope to tweak its tax and spending positions than is being utilised, should Downing Street be willing to make the case.
So far, that has been reflected in Burnham’s tone, as well as some policy suggestions which are yet to be fleshed out in detail – such as an idea to increase borrowing outside the fiscal rules to allow for a rise in defence spending.
As the Labour leadership fight intensifies – without a big shift in the global backdrop – Britain’s bond market constraints could mean Burnham continues with a more pragmatic stance: not quite in hock, but not footloose either.
