Burnham bond-market blunder tests UK markets as inflation stays high

London — Andy Burnham's call for Labour to borrow an extra 40 billion pounds to fund council housing, large scale nationalisation, and other priorities drew a quick market reaction, with government debt costs rising on the prospect of bigger borrowing.

The ten year gilt yield rose above 4.75% in Friday trading, underscoring how sensitive markets are to a shift in borrowing ambitions. The United Kingdom already pays a higher interest rate on debt than most G7 peers, a premium that first emerged after the 2022 budget and has widened since Labour won office. The spike in yields comes as the government grapples with a debt path that analysts say remains out of kilter with targets. In the first five months of the current financial year, borrowing ran about 15 billion pounds above the Office for Budget Responsibility forecast from March. Panmure Liberum economist Simon French estimates that closing the gap will require roughly 28 billion pounds more in taxes and or spending cuts, a mix that will ultimately be up to the chancellor. Still, analysts caution that raising taxes only would likely be poorly received by the bond market, whereas some spending restraint could help stabilize investor sentiment.

Britain is also contending with stubborn inflation. August figures showed CPI at 3.8%, CPI including owner-occupied housing costs at 4.1%, and the Retail Price Index at 4.6%. Economists widely expect the September data to be higher. By comparison, France is running about 0.8% inflation and the United States around 2.9%. The domestic inflation problem is linked to policy choices from the Budget last year, including higher employer National Insurance contributions and a higher minimum wage, which together have fed through to prices in many sectors. The result is a persistent inflation challenge that complicates the workload for the Bank of England, the bond markets, and the chancellor who must chart a path to lower inflation while sustaining growth.

There is little political will at present to push spending cuts sharply or to accept a rapid rise in taxes that would derail growth in the near term. Budget plans are expected to include some tax measures, but revenue gains look limited, and changes to capital gains tax introduced by the prior government have reduced the tax take. In this environment, the balance between new taxes and spending restraint is likely to fall to Chancellor Rachel Reeves. If Reeves leans heavily on taxes without trimming spending, markets could push back on the credibility of the fiscal plan; if she leans toward quicker restraint, the political chatter could intensify but may be better received by investors.

As Labour gathers in Liverpool for its annual conference, finance and inflation remain the defining challenges. The country is not yet in recession, but growth has slowed while price pressures persist. The discussion echoes a famous moment from the autumn of 1976 when Prime Minister James Callaghan warned that spending to ease a recession was no longer a viable option and that bond markets could compel spending reductions to secure an IMF loan. The lesson in contemporary terms is that inflation and growth matter more than unemployment at this stage, and that bond markets can constrain policy if inflation remains elevated. The path forward is uncertain, with politicians juggling the need to fund public aims against the risk that higher debt costs and inflation end up forcing tougher spending choices.

The next few months are likely to test whether the markets will tolerate a gradual approach to fiscal consolidation or demand sharper measures. For now, the trajectory remains a muddle through, with outcomes depending on how the budget shapes up, how inflation evolves, and how investors price the risk of government debt. The bond market will continue to watch the balance between tax increases and spending discipline, a balance that will reveal the political and economic contours of the year ahead.