Can Andy Burnham Improve UK economy?
So Britain has a new Prime Minister the 7th in a decade and even before he walked into Downing Street his own predecessor compared his economic plans to … Liz Truss. But, Burnham is not bothered, the so called King of the North claims that his plans to revitalise the regions of Britain will reassure markets and in the long-term make the government less in hock to bond markets.
That would be a big deal because when Truss came to power, bond yields were just over 3%. Four years later they are 4.9%, leaving the UK with debt interest payments of £110 billion a year, just one of the headaches Burnham inherits.
A month ago, I argued any PM would struggle to fix Britain’s economy. Forecasts of economic recovery have repeatedly failed to materialise, so can Burnham’s plans be any different?
What does Burnham Stand For?
The first question is what does Burnham actually stand for? The ex-health secretary is better known as Mayor of Manchester where his supporters claim he has helped revitalise local economy through initiatives such as local trams and buses. His key pledges included more public control of water, housing, energy and transport. The biggest council building programme since the postwar era. Devolution or Manchesterism. Cost of living support and fix social care overhaul. And this shopping list of ambition he’s promised while keeping the current fiscal rules.
There’s no love lost between Starmer and Burnham so was it fair to raise the spectre of Truss? In 2022, Truss’ unfunded tax cuts caused bond yield to spike, the Pound to fall and required emergency intervention. In 49 days she was gone, outlived by a lettuce. The uncomfortable similarity is that Burnham starts from a position of higher debt and higher bond yields. It means the UK government is now spending more on debt interest more than the entire education budget. But the truth is the Truss comparison is misleading, there will be no shock and awe budget, more a gradualist approach. In fact the real problem is not that Burnham is in danger of breaking fiscal rules, but in keeping them, he has tied himself in the same knots that affected Starmer and Reeves.
Like the Tory chancellors before her, Rachel Reeves frontloaded spending and backloaded the pain. The fiscal rules are met by allowing only very small rises in investment and current spending in the next three years. But, on top of this there are already committed costs. £5bn a year for Send plus defence spending, with no plan on how to reach 3.5% of GDP. By 2029/30, Reeves pencilled in austerity scale spending cuts, not exactly what you want in an election year. To avoid pressure to call another election, Burnham has promised to keep Labour’s manifesto commitments – no rise in the main tax source and, pension triple lock. But will he be able to finance any spending commitment, if you can’t raise tax or break the rules?
Yet, there are more pressures facing Burnham and his new chancellor. Firstly, the Iran war has worsened prospects for growth and reduced the fiscal headroom. Household energy bills climbed £221 a year in July, pushing the average annual bill to £1,862. With oil prices going back up, that is potentially another autumn shock. Ominously, gas imports to Europe are falling as the Hormuz chokehold returns.
Yet, it is more than short-term issues, welfare spending on health related benefits is rising sharply, incapacity benefit claims have increased sharply since 2019. Burnham has promised to support people into work rather than pay benefits. Nice in theory but ambitious and requires money upfront. The big question is can Burnham cap welfare spending without another backbench revolt?
Burnham inherits both a rise in disguised unemployment and also a rise in youth NEET. Tackling youth unemployment and youth inactivity will be difficult to achieve from limited resources and a change in culture of young people since Covid. He also promises to find a solution for social care, which is currently an unsatisfactory patch work of fixes. His old idea was inheritance tax as a care levy. In the words of Yes Minister, this would be a very courageous decision. Remember when Theresa May nearly lost an election to Jeremy Corbyn, it was partly because of her “death tax” A bit unfair, but that’s politics.
His best chance maybe to really invest in sorting the cost of energy. The economist noted that it is highly visible things like energy bills which people really notice. Can Burnham end Starmer’s timidity?
This week Octopus boss Greg Jackson — a Labour donor, it should be said — wrote to Burnham claiming market reform could cut household bills by almost £200 a year: £114 from breaking the link between electricity prices and expensive gas, £75 more from shifting levies onto general taxation. Octopus reckons the current pricing rules added £1.5 billion to our bills last year. And a separate Common Wealth study says the government buying electricity directly could deliver a similar saving. The catch? Reform takes two years.
If I was a political adviser, I would say go bold on energy prices so you can go electorate that we achieved at least one promise fulfilled. With the CBI claiming Britain’s industrial electricity prices are around 45% higher than the G7 average, cutting electricity prices for industry is essential for slowing down deindustrialisation.
So what chance does Andy Burnham have to make a difference? Firstly vibes are actually important, UK households have built up savings as pessimism has become a default state of mind.
A more cherry and upbeat outlook could unlock spending and investment. Growth this year hasn’t been amazing, but it is respectable compared to the rest of the G7.
However, you can’t just smile away Britain’s expected rise in spending and debt.
This is OBR projections on current spending and tax. The truth is it will not be much fun running and ageing and slowing economy.
The truth is there are hard choices, and most of those which would make a difference have already been ruled out. The biggest challenge Burnham will face is trying to make significant change when the fiscal rules are already very binding on what can be achieved.
Also, like many other chancellor’s there is a fear some things are out of control, just when it looked like oil price rise may be over, today Iran warns not a single ship will leave Hormuz, and with Russian oil refineries in flames, this could blow a hole in diesel and petrol prices, creating a new cost of living crisis.
UK Economic positives?
There are some positive improvements in UK economy that Burnham may be in a better position to take credit for. Net migration has fallen to more manageable levels, yet the perception hasn’t kept up with stats. Small boat arrivals are lower than last year, as European migration falls. Waiting lists on the NHS edge downwards, though very slowly when you zoom out. Reeves and Starmer did start to improve planning laws, though it hasn’t led to any rise in housebuilding.
Even the promise to build council housing may sound nice in the abstract. But it’s no magic bullet, even if you increased the number of council houses, it wouldn’t make much of a dent in average rent costs for most people.
One of Burnham’s more interesting ideas is a long-term interest in a Land value tax. It could be a way to reduce the incentives for landlords to keep shops unoccupied the kind of scene which blights many towns and city centres. A land value tax has potential merits, but it is a fundamental change in the tax system, which can’t be rushed through. It’s not the kind of thing to give a quick bounce in the poll ratings.
What about Manchesterism we hear so much about? Could devolution unlock growth in every postcode, the argument is that local politicians have a better feel for what a region needs than a top down Whitehall approach. The Bee network definitely helped mobility within Manchester and combined with market friendly policies encouraged investment. But could this be replicated in smaller towns like Wigan and Sunderland? Again, it would require significant spending, but would the funds be there? The fear is something has to give, break the rules, break promises on tax or cut the promises. What would you do if you were in Burnham’s shoes?
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