Burnham's first week

As Andy Burnham’s first week in No.10 draws to a close, attention is on the Treasury. Investment Officer, Isabel Albarran, looks at the three challenges the new Executive must solve and the investment implications.

It is less than a year since talk of Andy Burnham challenging Keir Starmer for the Labour leadership first surfaced, and the market response has so far been more sanguine than investors feared at the time. Back in September 2025, talk of rejecting “being in hock to the bond market” raised concerns amongst investors, with Liz Truss’ ill-fated 2022 budget still a relatively recent memory.

Today, with Burnham in power, bond yields are admittedly higher than they were back in 2025, but this is to a large degree a global phenomenon, reflecting broader inflation dynamics. There is likely a Burnham risk-premium embedded in UK bond yields, perhaps exacerbated by his recent talk of “fiscal flexibility”, but its impact has been less seismic than many may have expected.

Nonetheless, Burnham and his new chancellor will have to make some difficult decisions about spending and taxation, and this will provide a fuller test of the market reaction. 

Most prominent on the to-do list is the Autumn Budget, likely in October or November. This maiden budget for incoming Chancellor John Healey will set the tone for the new Executive, as well as providing meaningful challenges. Challenge number one will be deciding how to approach the fiscal rules, self-imposed restrictions designed to enforce probity on the Chancellor and reassure bond investors.
There are three existing rules, which Healey is likely to want to adapt, though any changes must be carefully calibrated not to impair fiscal credibility:

•    The stability rule (the current budget should be on course to be in balance or surplus by 2029/30) 
•    The investment rule (net financial debt should fall as a share of the economy in 2029/30)
•    The welfare cap (some types of welfare spending must remain below a pre-specified level) 

The investment rule is most likely to be adapted to put greater emphasis on the value created by long-term investment projects, such as social housing or infrastructure spending.

The second challenge is taxation – in its 2024 manifesto, the Labour Party ruled out changes to the most significant potential revenue raisers: income tax, National Insurance (for employees) and VAT. Together, these measures account for around two thirds of the tax take. As a result, Starmer and Reeves had to rely on a large number of smaller tax levers to raise revenues, some of which (for example, Inheritance Tax on farms) were disproportionately politically costly relative to the revenues they raised. Burnham and Healey must now decide if they will keep the tax pledge, limiting room for higher spending, or risk the political fallout of reneging on a promise to voters.

Balancing the requirements of the bond market and tax-paying voters would be more readily achievable were it not for a third challenge – the need for higher spending. This is driven by factors both in and out of Burnham’s control. While new policy decisions are within his control, there are a number of legacy decisions that need resolution. Current budget plans assume real-terms cuts to public spending for the rest of the forecast. A third of the cost of the recently announced Defence Investment Plan remains unfunded. Burnham’s recent decision to scrap VAT on household energy bills is said to be funded by cancelling the Digital ID programme, which is also understood to be currently unfunded.

Looking beyond the policy space, interest rates have risen since the Iran conflict broke out in the spring, increasing the cost of borrowing and rapidly demolishing much of Rachel Reeves’ £20bn of fiscal headroom and likely adding c. £5bn to UK borrowing projections. Taking policy and macro factors together, it is very likely that Healey will look to increase spending to meet the higher interest burden, avoid real-terms spending cuts and deliver on defence and cost-of-living pledges. This will make the budget a tricky balancing act and a triple test. 

For investors, it is possible that UK assets, and the pound, face some volatility as we approach the autumn and we will be closely following policy announcements, from the perspective of both public finances and personal tax rates. The possibility of a rise in UK bond yields has been well telegraphed, and we have had a preference for shorter-dated bonds as a result, which are less sensitive to changes in interest rate expectations. Although it is worth remembering that, for investors, higher yields can offer a better buffer against further bouts of volatility, as well as an income which can be built-up or reinvested. A pro-growth policy agenda may benefit UK companies if it is believed to lift economic activity, and by extension UK stocks. However, within the UK equity universe, it remains the case that much of the large-cap section of the main market index is relatively less sensitive to domestic factors, given the high exposure to overseas earners. This may be welcome if UK assets come under pressure.

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