Bond-market backlash after Burnham borrowing pitch, McRae says
Analysts warn Labour's plan to borrow more could lift gilt yields and fuel inflation, as inflation remains well above some peers and the path to consolidation remains uncertain ahead of the Labour conference.
A column by Hamish McRae argues that Andy Burnham's call for an extra 40 billion pounds of borrowing to fund housing and nationalisation misreads how debt markets operate. McRae notes that any move to borrow more would deepen government reliance on bond markets, contrary to Burnham's aim of reducing market dependence.
The remarks coincided with a sell-off in UK government bonds, with the 10-year gilt yield pushing above 4.75% in late Friday trading. The government already pays a higher rate on its debt than any other G7 nation, a premium that emerged during the 2022 fiscal upheaval and has risen since Labour took power. The prospect of a Burnham administration could lift yields further, though markets also weigh the broader fiscal trajectory.
On the fiscal side, the first five months of the current financial year showed borrowing above the March Office for Budget Responsibility forecast by about £15 billion. Simon French, economist at Panmure Liberum, estimates that rectifying the path would require roughly £28 billion more in either tax rises or spending cuts in the next Budget. The final mix is for Chancellor Rachel Reeves to decide, but market watchers warn that relying on tax increases alone without any spending restraint could be challenging for investors.
Inflation remains a central concern. The August figures showed the headline Consumer Prices Index at 3.8%, with 4.1% for the version that includes owner-occupied housing costs, and 4.6% for the Retail Price Index. Those readings are far higher than France at 0.8% and the United States at 2.9%. Economists say the September data are likely to show continued pressure on prices, extending the inflation challenge for policy makers.
The inflation pulse has been fed by policy choices in the Budget, including changes to employers' National Insurance Contributions and a higher minimum wage, which have translated into higher prices and, in some sectors, job cuts such as in hospitality. Additional tax changes and reforms to capital gains and non-doms have also affected receipts, complicating the outlook for fiscal consolidation. With political appetite for spending restraint limited, observers expect more muddling-through ahead unless bond-market pressures force sharper action on spending.
As Labour gathers in Liverpool for its annual conference, the episode echoes a historical lesson. In September 1976, amid an IMF bailout effort, a UK prime minister warned delegates that spending alone could not pull the economy out of a recession; the bond market ultimately compelled spending cuts to secure the loan. The parallel today is that inflation and growth remain the central challenge, and markets could again shape policy choices if the path remains uncertain.
With growth slower and living costs rising, the challenge for Reeves and her successor is to align fiscal and monetary policy in a way that restores confidence without triggering unnecessary pain. For now, the political will to rein in spending seems restrained, and the bond-market response to Burnham’s proposals underscores the risks of taking on more debt without a credible plan to restore balance.
In the world context, the episode underscores how domestic inflation dynamics and debt management decisions reverberate beyond national borders, shaping investor sentiment and influencing the global cadence of monetary policy.