Starmer’s decade of national renewal has ended prematurely, and the age of Andy Burnham has now begun.
The new “cost of living” government has announced a slew of measures in its first week to make daily life more affordable, an ambitious programme to bring energy and utilities under public control, the biggest council housing programme “since the war”, all while committing itself to Reeves’ fiscal rules.
But how? The UK still has less than £25 billion in fiscal headroom and an ever-growing, seemingly incurable deficit.
Burnham, with his Chancellor, John Healey, will have to contend with the trilemma that has paralysed public spending in modern politics: the challenges of borrowing money, raising taxes or cutting day-to-day spending.
Borrowing
Tuned-in politics junkies remember the Truss Ministry (Autumn 2022) which attempted to fund tax cuts through borrowing. A reliance on debt destroyed the price of gilts – the main collateral used by pension funds against interest rate derivatives. The rest is history.
Prime Ministers who plan on surviving the 60-day mark have since vowed not to fund day-to-day spending through borrowing.
Indeed, when he was a prospective Prime Minister, Burnham floated the idea of ignoring the bond markets, a plan which he has now rolled back. Reeves’ fiscal rules – to which Burnham has subjected himself – rule out the prospect of permanent spending through borrowing.
Raising taxes
It is politically unfeasible to raise income tax less than three years before an election and no party has won an election in the post-war era promising to raise taxes. Earlier this week, Burnham ruled out raising the top rate of tax and has changed his position on adjusting the personal allowance.
Many key stakeholders on his team, like Miatta Fahnbulleh (now Energy Secretary), have proposed raising capital gains tax to ease the cost-of-living crisis.
However, this position is fiscally controversial, with the IMF warning the government not to fund public spending by raising taxes. Beyond this, Burnham will be keen to preserve one of Starmer’s most concrete achievements: becoming only the second Labour Prime Minister not to preside over a financial crisis (Tony Blair).
Reassigning day-to-day spending
There is little appetite on Burnham’s team for another attempt at cutting benefits after Starmer’s back-to-back U-turns on cutting the Winter Fuel and Personal Independence Payments. Indeed, Burnham’s closest ally, Louise Haigh, led the backbench rebellion against the PIP cuts. Future attempts, likely stewarded by Pat McFadden, will be far stealthier.
This comes in the context of a welfare and pensions bill that by default rises year on year.
While Burnham is considering welfare reform, it is unlikely to come quick enough or big enough to cover his existing spending pledges.
However, some of the required spending will have to be found in the Ministry of Defence. Defence Secretary Wes Streeting and former Defence Secretary – now Chancellor, John Healey – have been very quiet on the UK’s commitment to spend 3% of GDP on defence this week, a policy over which Healey resigned from Starmer’s government.
There is one other method, from a different era.
Economic growth.
The new Prime Minister promises “good growth in every postcode” by seeking to revive domestic manufacturing through devolution, driven through No. 10 North. Regular year-on-year growth would resolve much of the inherent tension in British politics, providing tangible and fiscally feasible improvements to the lives of voters. Burnham has already deviated from the left-wing playbook, coming out as “open-minded” on North Sea oil and gas and proposing reindustrialisation of left-behind areas. But is this going to be enough to generate the sustained economic growth that every Prime Minister hopes for?
The next few years will reveal if the Prime Minister has managed to deliver economic growth, or if Labour politicians continue to demand a level of public spending that they are unwilling to fund.
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