Faisal Islam: Burnham seeks to calm markets by committing to fiscal rules

Greater Manchester Mayor Andy Burnham has publicly affirmed his commitment to adhering to the UK government’s current borrowing limits, known as the fiscal rules. This stance marks a shift from his earlier suggestions that the rules could be altered, such as by exempting increases in defence spending, similar to recent changes in Germany. Such a move had been seen as a way to enable additional public spending.

In recent days, financial markets appeared to respond to Burnham’s position. His candidacy in the Makerfield by-election, alongside speculation about a swift Labour leadership contest and his potential rise to party leader, had previously caused borrowing costs in the UK to increase. However, once Burnham’s campaign clarified that changing the fiscal rules was off the table, UK 10-year gilt yields—an indicator of government borrowing costs—experienced a decline. Bond market specialist Mohamed El-Erian highlighted this development, stating that Burnham’s comments helped boost the UK bond market amid global financial volatility.

The International Monetary Fund (IMF) also weighed in on the fiscal debate, urging the UK to maintain its existing borrowing rules. These rules are designed to limit government borrowing for routine public spending and aim to reduce national debt as a proportion of income by the end of the current Parliament, which is expected in 2029. While there is consensus on the need for a plan to reduce debt, calls have been made to depoliticize fiscal policy to reduce uncertainty that negatively impacts financial markets.

Geopolitical tension, particularly the war involving the US, Israel, Iran, and a blockade in the Strait of Hormuz, has been a key factor driving up borrowing costs across the G7 countries. The resulting increase in inflation expectations and interest rates has led to heightened sensitivity around the UK’s borrowing plans. Though various governments have adjusted fiscal rules over time, proposals from think tanks backing Burnham suggest reforms to allow greater investment spending but only after achieving a budget surplus in future years. Burnham himself supports infrastructure projects, including high-speed rail in northern England, but sticking to current fiscal constraints may require difficult decisions on taxation or welfare spending. Meanwhile, political opponents warn about the economic risks of any borrowing increases, while Burnham’s team criticizes their approach for long-term economic neglect

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