Andy Burnham’s arrival as Prime Minister has changed the outlook for UK fiscal policy and sterling. His focus on the cost-of-living crisis suggests a more interventionist government, with greater emphasis on public support and spending. The central issue is whether the government can deliver those policies without weakening confidence in the public finances.
Burnham’s first 100 days and the Autumn Budget will be critical. Markets will be watching for clear answers on taxation, borrowing and spending. Any sign that fiscal rules are being loosened without a credible funding plan could put further pressure on UK government bonds and the pound.
Inflation has moved lower. UK consumer price inflation fell to 2.6% in June from 2.8%, below the 2.7% forecast. Services inflation eased to 3.6%, while goods inflation fell to 1.7%.
Sterling weakened after the data was released. Lower inflation reduces pressure on the Bank of England to raise interest rates. That can lower expected UK yields and reduce support for the pound.
Fiscal policy is now adding another layer of risk.
UK government bonds came under pressure after Burnham suggested that the fiscal rules could be applied more flexibly. The comments created uncertainty because they appeared to soften the government’s previous commitment to the existing framework.
The appointment of John Healey as Chancellor helped limit the initial reaction. Healey is seen as a more disciplined choice than some of the other candidates considered for the role. His appointment reduced immediate concerns about a sharp increase in borrowing. However, the funding challenge remains.
Healey supports higher defence spending, while changes to bus-fare and energy-bill support have raised questions about where the government will cut costs and where it will spend more. Labour figures have also disagreed over whether savings from the abandoned digital identity programme can be redirected to other priorities.
The government has limited room for error. Higher spending without clear funding could increase borrowing costs and force the Treasury to offer higher yields to attract buyers of UK debt.
The bond market has already responded. Ten-year gilt yields rose by eight basis points to 5.04%, while 30-year yields increased by nine basis points to 5.75%, their highest level in two months. German and US yields rose by less over the same period. Sterling also weakened.
When gilt yields rise while the pound falls, the move can signal concern rather than confidence. In this case, the market appeared to be demanding more compensation for holding UK debt because of higher fiscal risk.
The Autumn Budget will be the main test. A credible Budget could stabilise the bond market and support sterling. A weaker plan could increase borrowing costs, raise the UK risk premium and create further currency volatility.
During Keir Starmer’s first 100 days, GBP/USD rose from about 1.26 to almost 1.34. Sterling later weakened as concerns about the Autumn Budget increased. The same pattern may not repeat, but it shows how quickly political optimism can give way to fiscal scrutiny.
Burnham’s government now needs to show that it can increase support for households while keeping borrowing under control. Until that becomes clear, sterling, gilt yields and payment timing will remain closely linked to every major fiscal announcement.
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