The UK government’s 10-year borrowing rate climbed above 5% on Monday, a move not mirrored in other European economies, as markets reacted to Prime Minister Andy Burnham’s suggestion that he would use “flexibility” in borrowing rules to fund new policies. The increase was modest but underscored the sensitivities surrounding Burnham’s first major economic test: delivering Tuesday’s promised cost-of-living support while keeping it paid for.
Until now, Burnham has described his policy changes with a broad brush. From today, he faces the constraints and trade-offs of high national office. The “flexibility” he spoke of relates to the treatment of financial institutions, allowing certain types of borrowing – previously applied to green energy policies – to be exempted from debt measures, with scope to extend to housing and other infrastructure. It was not a general suggestion to use up increased headroom against fiscal rules.
“New PM Andy Burnham faces market jitters as 10-year borrowing rises, replaces Rachel Reeves with John Healey as chancellor.”
The borrowing uptick came as Burnham overhauled his cabinet, replacing Chancellor Rachel Reeves with former defence secretary John Healey. Healey, a surprise choice, spent half a decade in Gordon Brown’s Treasury and worked on the Regional Development Agencies later scrapped by the Coalition. Downing Street stressed that Burnham and Healey “have the same outlook” on maintaining economic stability, fiscal rules, reindustrialisation, devolution, and backing British jobs and industry.
But the new chancellor faces an immediate trade-off. Healey resigned as defence secretary last month over funding the defence settlement, calling for more spending. Previous defence increases came from cutting home infrastructure on transport and energy investment. How he will square those priorities as chancellor remains an open question.
Healey will likely calm market jitters after Monday’s rise in government borrowing costs. He must quickly deliver a funded cost-of-living policy. Meanwhile, Burnham’s camp has floated the idea of unfreezing the income tax threshold – a move the BBC’s economics editor says is being taken seriously.
Every tricky decision is being watched by the country and the markets simultaneously. The new prime minister’s priorities will soon become clear when push comes to shove.