Andy Burnham’s victory in the Makerfield by-election last night may prove to be far more than a local political story.
While by-election results rarely shift the focus of financial advisers and wealth managers, Burnham’s return to Westminster has reignited speculation over Labour’s leadership and, with it, the future direction of UK economic policy. Questions are already being asked about whether PM, Sir Keir Starmer, can contain growing pressure within his party and whether Burnham’s re-entry to the House of Commons could accelerate a formal leadership challenge or even force a managed transition at the top.
For advisers, the immediate issue is not simply who leads Labour – and therefore the country as PM -next, but what political instability could mean for markets, fiscal policy and investor confidence.
That matters particularly at a time when the UK’s public finances are under a lot of strain. Fresh figures this morning showed government borrowing in May rose to £23.3bn, around 30% higher than a year earlier, underlining the difficult fiscal backdrop any future PM would inherit.
With gilt yields still elevated, debt servicing costs climbing and the Treasury under pressure to balance spending commitments against market credibility, any shift in leadership could quickly become a market event. For advisers, that raises important questions around UK bond exposure, sterling volatility, tax policy and the broader outlook for domestic equities.
Here, industry experts assess what Burnham’s return to Parliament — and the political and economic uncertainty it may unleash — could mean for portfolios, policy and the path ahead for investors.
Danni Hewson, AJ Bell head of financial analysis, comments: “Today’s borrowing figures are a chillingly well-timed reminder to any would-be prime minister that the bond markets matter when a country is carrying as much debt as the UK currently is.
“Debt interest hit a record high for May, and at £11.7 billion it accounted for almost half of the staggeringly high £23.3 billion borrowed by the government.
“Much of the increase in debt interest was down to higher inflation, which jumped up between February and March as conflict erupted in the Middle East. This also added to the day-to-day costs of providing public services as the year progressed.
“The last time borrowing for the month of May exceeded what was required to plug the gaps was right at the start of the pandemic when the government raided its coffers to cover the wages of millions of workers furloughed because of lockdowns.
“Long-term borrowing costs have been creeping up and will be monitored closely if the anticipated Labour leadership contest gets underway, following Andy Burnham’s return to Parliament after a win in the Makerfield by-election. Burnham has drafted in economic heavyweights to help shore up his credentials and has pledged to follow the existing fiscal rules, which includes not borrowing to fund day-to-day spending.
“It’s a good job that pledge is based on a future budget because the current budget deficit in the year to May is already £7 billion more than it was this time last year, and £6 billion more than had been forecast by the OBR. And that’s despite the positive impact of tax changes which padded out the Treasury coffers to the tune of £3.4 billion in the month of May.
“There has been better than expected news on the economic front when it comes to inflation, and if the US and Iran can actually get around the table to hammer out some of the finer details of the peace deal, prices should continue to fall back.
“Whilst the government can’t control external geopolitics, the country needs to be ready to take advantage of any positive momentum and not get caught up in a long, destabilising fight for Number 10.”
Susannah Streeter, Chief Investment Strategist, Wealth Club
“There has been no Burnham bounce for UK assets following Labour’s victory in the Makerfield by-election, but equally there has been no battering from uneasy investors. Financial markets are taking the political developments largely in their stride. It’s been more of a ‘meh’ reaction as investors appear to have got used to political shenanigans at Westminster and appear to have already factored in the likelihood of a leadership challenge.
“The FTSE 100 is flat in early trade, while sterling has edged down against major currencies and gilt yields have ticked higher. The muted moves suggest investors are still weighing up what the result means for the future direction of economic policy. For now, that may be because Andy Burnham has promised to be more cautious about spending by largely sticking to fiscal rules. He also appears willing to tackle the large benefits bill, arguing that welfare reform should focus on helping more people into work. His pledge to bring down huge welfare costs, partly to fund higher defence spending, is a signal that he is positioning himself closer to the political centre, which may be providing some reassurance.
“The latest government borrowing snapshot highlights the tricky fiscal tightrope he’ll have to walk if he does get the keys to Number 10. UK borrowing increased in May by almost a third compared to the same month last year, reaching £23.3 billion. Interest payable on government debt shot up to £11.7 billion – the highest ever recorded for the month. It highlights the need to keep bond markets on side and demonstrate that his policies will be aimed at bringing down long-term borrowing, with credible plans for reviving growth.
“For now, investors are balancing the political uncertainty which is swirling against signs of a bit more resilience in the UK economy. Retail sales came in stronger than expected in May, offering fresh evidence that consumers are spending a little more than expected despite higher borrowing costs and ongoing pressure on household finances. The figures provide some encouragement that consumer demand is holding up better than anticipated. Nevertheless, confidence remains fragile. Although the latest GfK survey showed consumer sentiment holding steady rather than deteriorating further, households continue to face a challenging backdrop of elevated living costs and sluggish economic growth.
“The modest rise in gilt yields may also indicate that investors are reassessing the outlook for interest rates following the stronger retail sales data. While the Bank of England left rates unchanged, evidence of resilience in consumer spending may reinforce expectations that policymakers will remain cautious about higher prices being given freer rein to filter through.
“Attention also remains focused on the agreement between the United States and Iran. Although the deal appears to be a step towards greater stability in the Middle East and a potential boost to global energy supplies, there is still a risk it hands Tehran significant economic benefits without securing stronger concessions. Brent crude has recovered to just under $80 a barrel, suggesting traders remain wary about the balance between increased supply and the risk of tense geopolitics flaring up again.”
Richard Carter, head of fixed interest research at Quilter Cheviot said:
“Today’s borrowing figures put the challenges facing Andy Burnham into sharp contrast should he now go on to contend for the leadership of the Labour Party and thus the country. Burnham has achieved his first goal of returning to parliament, with a resounding victory in the Makerfield byelection likely to now propel him to number ten. However, markets await to see just how quickly he looks to strike and ultimately seize the premiership from Keir Starmer, and what his economic plan looks like exactly.
“It comes at a time, however, where the public finances remain incredibly stretched and strained. Borrowing for May was £23.3 billion, 30% higher than the same time last year and comfortably above the £17.7bn forecast by the OBR. While yields have come down in recent weeks as the US and Iran resolve their conflict, borrowing is higher than it was last year and bond markets are still uncomfortable with the level of borrowing and lack of spending cuts being proposed by this government.
“Ultimately none of that is going to change with a Burnham government, and in fact could easily see further entrenchment. Burnham will likely be elected by the Labour Party to bring the government more to the left, increasing taxes, spending and ultimately borrowing – indeed the concept of additional borrowing specifically to fund much needed defence spending has been mooted of late. As such, the yield on this debt is likely to remain at a premium compared to developed market peers, resulting in increasing costs for debt interest – indeed interest stood at £11.7bn in May, more than 50% higher than the same time last year. He has looked to calm market fears with sensible appointments of economic advisers, including the former head of the OBR, but even still he is going to be challenged fiscally should he become prime minister.
“The political picture is likely to get messy in the short-term, but concerns around the public finances will endure long after it is resolved.”
Dan Coatsworth, head of markets at AJ Bell, comments:
“Andy Burnham’s by-election victory hasn’t fazed bond markets, but this might simply be the calm before the storm.
“Keir Starmer has so far indicated he won’t step down, which means there could be a leadership challenge and that could cause unease on the markets. Investors hate uncertainty and politics has a habit of making their heads spin.
How has the market reacted today?
“Burnham has already rowed back on some ideas in recent weeks, which hints that he might not lead in such a different way to the status quo should he become prime minister. He has committed to the current fiscal rules and appears to have backed down from earlier suggestions that he didn’t want to be told what to do by the bond markets.
“That might explain the muted reaction to the by-election result. Even though the 10-year gilt yield nudged up a fraction to 4.82%, it is below the 5%-plus levels seen in May when Labour suffered major setbacks in local elections.
“The 30-year gilt yield is a better measure of political sentiment as the government typically issues long-term debt. Yields for 30-year UK government bonds followed the same pattern as the 10-year, moving up a small amount to 5.52% yet trading nowhere near May’s levels.
“Friday’s moves reflect the risk that Starmer won’t go quietly. But they also reflect the setback with the US-Iran peace deal which has caused oil prices to rise again today, and inflation fears to remain on the table, thus having a direct read-across to interest rates and bond yields.
“Over the coming days, the bond market will look for clues on Burnham’s chances for getting the top job, and how he might steer Labour in a different direction. He might not have wanted to rock the boat ahead of the by-election for fear of causing upset or ruining his chances. Now he’s in a stronger position to lay out policy changes and not simply tow the party line.
All eyes on the next chancellor
“Burnham’s choice of chancellor if he becomes prime minister could have a major impact on bond markets.
“Bond investors like boring and dull – they want someone who has a plan where the maths stacks up and they stick to it. Former transport secretary Louise Haigh is seen as one of Burnham’s closest allies, but a fraud conviction could stop her from being the country’s numbers person. Ed Miliband is also being touted as a potential candidate for chancellor and would bring considerable experience from prior senior political roles.
Reform’s political challenge hasn’t gone away
“Earlier this month, Burnham indicated he would not call an early general election if he becomes UK prime minister. However, you can never say never when it comes to politics. Burnham, if he becomes leader, might come under pressure to prove that he’s the person the nation wants to run the country. The scale of his win in the Makerfield by-election was solid, but just one result. Reform continues to bite at Labour’s heels and so a general election win for the incumbent party under Burnham would not be a shoe-in.
“Should an early general election be called and were Labour to lose power to Reform, then bond markets could have a much bigger issue on their hands. A Reform government would almost certainly make investors demand a higher reward for the risk of backing the UK, as Reform’s policies are currently thin on detail. In that situation, expect higher bond yields, a more volatile pound, and concerns that any unfunded tax cuts will put even more pressure on government borrowing.”
