Britain's economy may not be able to withstand additional tax increases, according to warnings from Andy Burnham and economists, as the country potentially faces a new Prime Minister this summer. Keir Starmer announced his resignation on Monday, opening the door for Burnham, the MP for Makerfield, to assume leadership.
Concerns are mounting that a shift in political direction could lead to increased spending funded by further tax hikes. The current tax burden is already at an all-time high, with Chancellor Rachel Reeves having implemented approximately £75 billion in increases since taking office less than two years ago. This has reportedly impacted businesses and households, contributing to economic struggles and a generation of young people facing long-term unemployment.
Mohit Kumar, an economist at Jefferies, stated that it is unclear where the funds for any additional spending would originate. He cautioned that taxes have reached a point where further increases could be counterproductive. The bond markets are reportedly monitoring the situation closely for any indication of a loosening of fiscal policy by a potential Burnham government.
Yields on the UK's ten-year gilts are currently around 4.8 percent, among the highest in the G7 and developed nations. Mike Bell, head of market strategy at RBC Bluebay, suggested that gilt yields could return to 5 percent if the market questions the fiscal trajectory under a new leader. Matthew Ryan, head of market strategy at Ebury, described the potential political shift as an "unambiguously negative development for UK assets," anticipating a significant increase in public spending, a higher tax burden, and greater gilt issuance.
Economists note that higher bond yields would increase borrowing costs for the government, businesses, and households, drawing parallels to the market reaction following the 2022 mini-budget. Adam French, head of consumer finance at Moneyfactscompare.co.uk, pointed out that political volatility often leads to higher borrowing costs as investors demand a greater risk premium. He added that if financial plans lack credibility, a loss of confidence could quickly drive up borrowing costs, with households potentially bearing the brunt.
Business groups have called for stability and a clear growth strategy. Rain Newton-Smith, chief executive of the Confederation of British Industry, emphasized the need for stability, confidence, and a clear path to growth. Neil Carberry, boss of the Recruitment and Employment Confederation, urged the next leader to support businesses rather than implement policies perceived as detrimental to trading conditions. Scott Dawson, chief executive of payments firm Decta, highlighted the perception of instability in the UK due to frequent changes in leadership, which he believes deters overseas investors and contributes to the view of the UK as a "basket case."