Kemi Badenoch, the Conservative leader, has sharply criticized Prime Minister Andy Burnham's fiscal approach, labeling him a "spendthrift people-pleaser" during his inaugural appearance at Prime Minister's Questions. Badenoch asserted that Burnham has refused to curb spending demands from within his own Labour party, warning that investors are concerned by rising interest rates on the government's debt.
"I think it's delightful that he wants to make everyone happy. But a prime minister needs to be a leader, not a people pleaser," Badenoch stated, suggesting that Burnham's tendency to agree to all spending requests could lead to fiscal instability. The Prime Minister, while not ruling out tax increases in the upcoming Budget, expressed a desire to reduce the welfare bill.
Burnham's debut in Parliament has drawn criticism from allies and economists alike. Jim O'Neill, a former minister and Goldman Sachs economist, who recently declined a role advising the Prime Minister, warned that the UK risks being "punished" for a lack of a "sensible fiscal strategy." O'Neill urged Burnham to "get real" on issues like welfare and state pensions, indicating that his recent speech was not what markets wanted to hear. "If your country is under the focus of 'can they come up with a sensible fiscal strategy' on a day when the markets think 'well no, you're not showing any sign of it' you're going to have a tough day… if it stays like this your mortgage rate is going up," O'Neill told LBC. Interest rates on government bonds, known as gilts, rose during Burnham's statement and continued to climb the following morning, reaching multi-decade highs during the day.
Global factors, including the ongoing conflict between the US and Iran and persistent inflation, have been contributing to rising state debt costs worldwide. However, the UK is perceived as particularly vulnerable. Experts suggest that Chancellor John Healey may need to identify tax increases, or potentially spending cuts, amounting to as much as £14 billion to stabilize public finances before the Budget on October 28.
When challenged by Badenoch to provide an example of a spending request he had rejected, Burnham stated his priority is to address the high number of young people not in education, employment, or training. He argued that supporting young people is an investment in their success rather than paying for "failure." Badenoch countered that markets are concerned about a Prime Minister who is unwilling to specify funding sources for his pledges, presenting him with a choice between higher taxes, increased borrowing, or spending cuts. She pressed him on whether he was preparing to raise taxes again, to which Burnham responded that he would not pre-empt the Budget and that he and Chancellor Healey had set an early Budget date to reduce speculative uncertainty.
Burnham has committed to adhering to fiscal rules while also making spending promises and rejecting "crude cuts" to benefits. He has indicated that a revaluation of council tax, potentially impacting residents in London and the South East, remains a possibility. Chancellor Healey has also committed to a path for defense spending to reach 3% and then 3.5% of GDP, though the timeline will be revealed later.
Further analysis from the Resolution Foundation suggests UK taxpayers contribute less relative to other major economies, potentially supporting tax increases, including higher rates for middle earners, to fund increased defense spending. Cabinet Office minister Sally Jameson disagreed with Lord O'Neill's criticisms, emphasizing Burnham's commitment to fiscal rules and responsibility, and the importance of growth and optimism.
Sir Howard Davies, former chairman of NatWest, described the period leading up to the Budget as "very dicky," noting that while the bond sell-off might not signal a major crisis of confidence, market jitters are evident regarding Burnham's public spending approach. He suggested that clearer indications from the government on its fiscal balance strategy could help calm the markets. Davies also called for changes to the pension triple lock, stating the country cannot afford it.
Chris Beauchamp, Chief Market Analyst at IG, commented that while governments globally face pressure from bond markets, the UK's situation is particularly acute due to Burnham's economic reform promises confronting high debt levels and rising borrowing costs. Beauchamp noted that UK taxpayers may face increased costs for the government's initiatives, alongside the potential for further Bank of England rate hikes influenced by oil prices. Burnham's vision for greater state control over the economy and potential reversal of Thatcher-era reforms have also been points of contention.