As Andy Burnham prepares to take the reins as Prime Minister, he faces a daunting fiscal landscape. The electoral success in Makerfield was marked by ambitious spending commitments, including nationalising water companies like Thames Water, significant payouts to 'Waspi women', reduced rail fares, and a record council house building programme since the Second World War.
The economic context for these pledges is stark. The UK economy continues to navigate the aftermath of the pandemic and the conflict in Ukraine, with intense scrutiny of government finances. Despite efforts to reduce borrowing through tax measures and minor spending cuts, the deficit remains high until at least 2030. Deutsche Bank analyst Jim Reid notes that a lack of stronger economic growth and persistent debt constraints will continue to challenge successive governments.
Inflation, a major concern for UK households, had been trending towards the Bank of England's 2% target but recent geopolitical events threaten to reverse this progress. Persistent high inflation directly impacts living costs, making it harder for any government to alleviate financial pressures on ordinary Britons. Compounding these issues is a radical slowdown in economic growth, Labour's key 'mission' which has not reached levels seen in previous decades. This lower growth partly attributed to the UK's 'productivity puzzle', strains public finances and limits the scope for increased public spending.
The combination of high inflation, near-stagnant growth, and previous looser fiscal policies has led to a significant increase in debt interest payments. These payments are now nearly double the budget allocated to the Ministry of Defence, highlighting the escalating cost of government borrowing. This financial burden makes fiscal choices considerably more difficult for any incoming administration, even with frameworks like Rachel Reeves' fiscal rules designed to limit borrowing.
The UK's jobs market is also showing signs of stagnation, with a notable decline in job vacancies over the past two years. Business complaints about wage pressures, increased employment regulations, and a £25 billion rise in labour taxes are contributing factors. A weakening jobs market can reduce tax revenues and increase demand for welfare support, further exacerbating fiscal pressures on the government.
Burnham's commitment to adhering to Rachel Reeves' fiscal rules, which aim to limit government borrowing, is an attempt to allay investor concerns. His alignment with Labour's manifesto by ruling out new borrowing for day-to-day spending also acknowledges the need for fiscal prudence in these challenging economic times.