Liz Truss’s Shadow over Andy Burnham | American Enterprise Institute

Next week, Andy Burnham, the left-leaning former mayor of Manchester, will replace Keir Starmer as the United Kingdom’s prime minister. He will do so not only at a time when the UK’s politics is coming to resemble that of Italy as underlined by the fact that he will be the sixth UK prime minister in ten years and that UK politics is becoming increasingly polarized. He will also do so at a time when the UK’s public finance situation appears to be at least as compromised as it was at the time of the 2022 Liz Truss UK government bond and currency market meltdown.

Liz Truss learned the hard way how ruthlessly markets can punish governments that try to pursue wayward budget policies. In response to a minibudget that proposed large unfunded tax cuts, financial markets reacted with alarm. The pound fell sharply, government bond yields spiked, and the Bank of England was forced to intervene to stabilize the bond market and to prevent the pension funds from collapsing. That market backlash cost Liz Truss her job as prime minister after only 49 days in office. It also forced Rishi Sunak, her replacement, to walk back practically all the tax measures that she had proposed.

If Mr. Burnham is to avoid Liz Truss’s unfortunate political end his first economic policy priority must be to establish credibility as one who can get the UK’s public finance back on a more sustainable path.  He will need to do so not simply by words but also by deeds when he is expected to present his budget plans after parliament’s summer recess.

One reason why Mr. Burnham needs to move quickly in establishing budget policy credibility is that markets are already watching him warily as underlined by the 100-basis point rise in the 30-year UK government bond rate over the past year to 5.8 percent, or to its highest level since 1998. Markets are wary in part because of Mr. Burnham’s ill-advised comments last year that the UK needs to move beyond being “in hock” to the markets. Those comments were interpreted as indicating his inclination to fiscal irresponsibility. 

Markets also seem to fear that Mr. Burnham will be subject to strong pressure from his Labor party to increase social spending without raising taxes on the UK’s workforce. It also does not help that the UK, along with most other European countries, will be forced to raise defense spending as a result of Trump’s demands on increased NATO defense spending by its European members.

Another reason Mr. Burnham will need to move early to shore up budget policy-credibility is that he will be inheriting a budget situation that is weaker than that inherited by Liz Truss. He also will be doing so in the context of a sclerotic UK economy that precludes the possibility for the UK to grow its way out from under its debt mountain. 

The UK’s public debt to GDP ratio has now risen to 95 percent while the budget deficit is running at more than 4.5 percent of GDP. As if this were not sufficient reason to take budget measures to strengthen the budget position, the UK now finds itself in a situation where inflation-adjusted interest rates have come to exceed the expected 0.6 percent GDP growth rate for 2026. That risks putting the UK public debt on an unsustainable path.

It would be a great mistake for Mr. Burnham to take comfort in the fact that a number of other major economies, including the United States, France, and Japan, also seem to be on unsustainable debt paths. Rather, their budget weakness seems to be all the more reason for the UK to shore up its public finances. After all, a currency and bond market crisis in any of those countries is bound to draw attention to the UK’s present public finance weaknesses.

Warren Buffet was fond of saying that “it takes 20 years to build a reputation and only five minutes to lose it. If you think about it, you will do things differently.” We have to hope that Mr. Burnham thinks about it and gives a UK government bond market already on edge no reason to doubt his commitment to a sound fiscal policy. If not, we should brace ourselves for more UK financial market volatility and more UK political instability.