Financial markets are largely awaiting further moves from Greater Manchester Mayor Andy Burnham regarding a potential challenge to Sir Keir Starmer's leadership, with investors bracing for increased borrowing costs and potential policy shifts.
Burnham is reportedly close to securing the nominations needed from Labour MPs to trigger a leadership contest. If successful in a bid, analysts suggest he would likely steer the government further left, potentially increasing taxes and public spending, which could lead to higher borrowing.
This comes at a time when public finances are already under strain. Figures for May showed government borrowing reached £23.3 billion, exceeding the Office for Budget Responsibility's forecast and marking an increase from £17.9 billion in May of the previous year. While markets have shown limited immediate reaction to Burnham's recent by-election win, borrowing costs have seen a slight increase. Ten-year gilt yields rose by 6 basis points to 4.82 percent, and 30-year yields also climbed 6 basis points to 5.15 percent. Sterling saw a minor dip, falling 0.08 percent to $1.32.
Experts predict further market volatility if a leadership contest ensues, particularly concerning economic policy and potential appointments to key roles like Chancellor. The choice of Chancellor would be critical in shaping market perceptions, with a more conventional appointee expected to limit volatility, while a less orthodox choice could widen risk premiums. Concerns are particularly high regarding potential chancellors associated with recent UK energy, labor market, or housing policies.
A primary market concern is that Burnham may advocate for tax increases to fund expanded public services. He has previously stated that "work is taxed too heavily and wealth too lightly" and has expressed openness to revaluing council tax, which has not been reformed since 1991, even if perceived as a wealth tax.
Burnham has also previously suggested moving "beyond this thing of being in hock to the bond markets." While he has stated an intention to adhere to current fiscal rules, pressure from within the Labour party may lead to increased welfare spending. Economists forecast that meeting existing fiscal rules will be challenging, potentially leading to tax-funded spending increases and a slight loosening of fiscal parameters, which could add inflationary pressure.
If a leadership contest occurs and extends over the summer, prolonged political uncertainty could further impact investor confidence and potentially lead to more significant increases in gilt yields. The possibility of Burnham calling a general election to capitalize on momentum is also a factor that could weigh on markets.