Prime Minister Andy Burnham is transitioning from broad-brush policy descriptions to the stark realities, trade-offs, and constraints of high national office. As he overhauls his cabinet, the new PM's immediate challenge is to demonstrate how his cost-of-living support announcements, scheduled for Tuesday, will be funded. This funding requirement means either a tax rise or a spending cut, quickly revealing Burnham's priorities when push comes to shove.
Meanwhile, financial markets have already reacted to suggestions that Burnham might use "flexibility" in borrowing rules to fund his new announcements. On Monday, the UK government's 10-year borrowing rate rose above 5% after falling in recent days, a trend not observed in other European economies. While the market movement was not massive, it highlights the sensitivities surrounding the administration as Burnham restructures his cabinet, notably replacing Rachel Reeves as chancellor with former defence secretary John Healey.
The "flexibility" Burnham referred to is understood to involve the treatment of financial institutions. This model, previously used in certain green energy policies, essentially helps exempt specific types of borrowing from debt measures. There is potential to extend this framework to housing and other infrastructure projects. Crucially, this was not a general suggestion to exhaust the increased headroom against the government's borrowing rules. Every difficult decision and trade-off is now being closely watched by both the public and the markets simultaneously.
John Healey is a surprise choice for chancellor, though perhaps he should not have been. He spent five years in Gordon Brown's Treasury, gaining specific knowledge of that era's efforts to regenerate and devolve power through Regional Development Agencies, which were later scrapped by the coalition government. Downing Street is emphasizing that Burnham and Healey share "the same outlook" on maintaining economic stability, adhering to current fiscal rules, reindustrialisation, devolution, addressing the cost-of-living crisis, and backing British jobs and industry to drive nationwide growth.
However, an immediate trade-off exists. Healey resigned as defence secretary just last month over funding for the defence settlement, having actively called for more defence spending. Previously, some increases in defence funding were achieved by cutting domestic infrastructure spending on transport and energy investment. How Healey will square these competing demands as chancellor remains to be seen. In his first comments as chancellor, Healey told broadcasters he will work "in lockstep" with the new PM "to meet the fiscal rules with a buffer against uncertainty" while making life more affordable. He also revealed he had just spoken to Andrew Bailey, the Governor of the Bank of England. Overall, Healey will probably calm any market jitters after Monday's uptick in government borrowing rates, but he must quickly deliver a funded cost of living policy.
On policy, Burnham's camp has floated the idea of unfreezing the income tax threshold, a proposal that is being taken very seriously. Significant trade unions have backed the idea, which would cost at least £4 billion depending on inflation. Some have suggested not only unfreezing the thresholds in 2027—which would lift the basic rate from £12,570 to £13,000 and the upper rate from £50,271 to £52,000—but rolling them back to where they would have been if the freeze had not been implemented in 2022. This rollback would be far more expensive. The UK is currently in the middle of a nine-year threshold freeze originally announced by then-chancellor Rishi Sunak to repay billions borrowed for Covid-19 lockdowns. This freeze was extended at the last Budget by Rachel Reeves until 2030-31, pushing one in six workers into the 40p tax bracket. Burnham noted that this issue came up on the doorstep in Makerfield, and it is notable that major unions are prioritizing a policy affecting members earning around £50,000 a year, such as nurses, midwives, paramedics, teachers, and engineers. However, current Number 10 insiders have pointed to this, noting that it adds to a list of net spending policies and raises questions about the extent of tax rises or extra borrowing required to make Budget sums add up.
Burnham's "Manchesterism" is what got him to Number 10, but the question remains whether it will work for the UK. More widely, Burnham has announced plans to publish a 10-year plan for the country and the economy later this year, which is expected to detail his wider vision for decentralisation, devolution, and rebuilding Britain. While such plans would ordinarily suggest a significant infrastructure programme, Burnham also wants to fund the Defence Investment Plan, a multi-billion, multi-year spending commitment for the UK military. How he will square these two goals is another major question.
Upon entering office, Burnham stated his first priority would be a national plan to end rough sleeping, with mass council house building as the long-term solution, though this will take years to feed through. Welfare reform represents another critical test. Burnham expects to demonstrate progress on what he terms "sustainable reform," leaning heavily on Alan Milburn's review. This review is likely to recommend significant job support funds and mental health assistance for young workers to reduce welfare bills. This reform is expected to be delivered by local mayors who understand what works in their respective regions. Burnham hopes to show the markets that he can deliver the welfare reform that eluded former Prime Minister Sir Keir Starmer.
This is the new PM's conundrum. He faces the same manifesto and borrowing rule constraints as his predecessor, yet he clearly wants to do more. He says his rewiring of Britain will help the economy grow, but many of these solutions could take years to yield results. Given the recent rapid turnover of prime ministers and chancellors, even thinking a few years ahead might feel like a luxury.
