Keir Starmer has announced plans to step aside as head of the UK’s Labour Party, laying the groundwork for Andy Burnham to become the next prime minister. The former Manchester mayor may not be Mr. Market’s ideal politician, but the recent rise in inflation-adjusted borrowing costs is more a testament to the long and unforgiving memories of gilt investors still haunted by Liz Truss’s mini-budget crisis of 2022.
Burnham got on traders’ bad side last year when he told the New Statesman magazine: “We’ve got to get beyond this thing of being in hock to the bond market.” He seems to have genuinely learned his lesson since then and understood that you can’t govern the UK without the market’s support, pledging commitment to the existing fiscal rules. For better or worse, investors have taken a “show me first” attitude. At the time of writing, real 10-year gilt yields were about 1.67%, flirting with a 2026 high, and the pound was just a whisker above its low for the calendar year.
All of this is a warning to other developed markets with debt levels on the verge of exceeding their gross domestic product. Following the Truss chaos of four years ago, the market has decided to approach the UK through a lens of always assuming the worst, a default that continues to cost British taxpayers in the form of higher interest rates.
Even the US, with its “exorbitant privilege,” could learn a thing or two from the UK’s battle to regain fiscal credibility: Once you lose the market’s trust, it’s brutally difficult to gain it back, and investors will panic given any little excuse. “As long as the deficit remains high, politics may continue to be a source of volatility,” Peder Beck-Friis, an economist at fixed-income fund manager Pimco, told me from the firm’s offices in London this month. “We think policymakers understand the constraints.”
If you take him at his word, Burnham doesn’t sound like he makes the UK’s fragile fiscal situation materially worse. His spokesperson told Bloomberg last month that he would stick with the fiscal rules that call for the chancellor to balance spending with tax revenues and cut debt relative to GDP by fiscal year 2029/30. One can argue that Burnham, a member of Labour’s so-called “soft left,” was forced into that position after the New Statesman uproar, but the causality doesn’t really matter. He now seems to understand that an unruly bond market threatens his ability to govern.
The popular Burnham is also a decent bulwark against the populist Reform UK (of the right) and Green Party (of the left), which both pose much greater budgetary and general political risks to markets. A general election is required to be called by August 2029, and there’s no telling where Burnham’s polling will stand by then, but it’s hard to imagine it could be worse than Starmer’s.
The irony, of course, is that Burnham is nothing like Truss, a Conservative tax-cutter who became the country’s shortest tenured prime minister at just 49 days. UK bond markets now lump tax-cutters and big-spenders together. Burnham will have to prove that he’s fiscally qualified to govern in a brutally restrictive environment of high and volatile borrowing costs.
Other countries should pay heed, including Japan and Europe’s other high-debt nations. Once debt-to-GDP ratios get persistently high, it only takes a single misstep to lose the market’s trust for years — and maybe much longer. The US is in a unique situation due to its exorbitant privilege of printing the reserve currency of the world. But that means the market fails to act as the agent of fiscal discipline that it’s starting to be in the UK — to America’s detriment. If it should ever lose some of its armor, the upheaval could be even worse.
In the UK, markets are likely to now turn their focus toward Burnham’s choice for chancellor. The appointment of someone such as energy secretary Ed Miliband — an ally from the Burnham soft-left wing — could send gilt yields higher. But Burnham could also make a market-friendly choice and prove that he’s learned from the Truss episode and his own rhetorical kerfuffle. Because once you’ve lost the bond market, everyday governance becomes much harder, as the rest of the world will find out for itself soon enough.
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