Andy Burnham’s Cost-of-Living Agenda Could Make Britain More Expensive

Andy Burnham entered Downing Street this week promising to make the cost of living his government’s defining priority. His first major announcement, the removal of VAT from household electricity bills, was designed to demonstrate immediate action. Other ambitions reportedly include cheaper bus travel, expanded social housing, social-care reform, greater public control of utilities and a broader program of industrial revival.

Each proposal is being presented as a way to relieve pressure on struggling households. Taken together, however, they raise a more fundamental question: How will Burnham pay for them?

Scrapping the previous government’s digital identification program may finance the initial energy measure (plus this Starmer policy was asinine). It will not, however, finance a permanent expansion of the British state. Public ownership, subsidized transport, new housing programs and expanded social services all carry substantial costs extending well beyond a single budget year.

Burnham has said his government will remain within Britain’s fiscal framework. Under the stability rule, the current budget must be on course to reach balance or surplus by 2029–30. Under the investment rule, public sector net financial debt must be falling as a share of GDP in the same year.

These rules are supposed to impose a limit on political ambition. But Burnham has also spoken about using the “flexibility” available within them, language that investors understandably interpret as a search for additional borrowing room. Following his inaugural speech, the ten-year gilt yield reportedly rose by 11 basis points to around 5.04 percent, even as other major bond markets were comparatively stable.

That reaction should not be dismissed as the grumbling of financiers. The gilt market is one of the most important cost-of-living institutions in Britain.

Bond markets are already voting on Andy Burnham’s spending ambitions. Since it became clear he would be the next prime minister, ten-year gilt yields have risen roughly a third of a percentage point, the market’s way of pricing in more borrowing, more debt issuance and less fiscal discipline.

That matters well beyond Westminster. Twenty years of Bank of England data show that when gilt yields rise, five-year mortgage rates follow, at about three-quarters of the move, typically within a year. A full one-point rise in yields (plausible if spending promises keep piling up) would push mortgage rates up roughly 0.75 points, adding around £100 a month to a typical UK mortgage and closer to £170 a month for a mortgage on a detached house.

A prime minister promising to cut the cost of living can undo that promise with a single fiscally reckless budget. The bond market already has Burnham’s number.

The consequences extend beyond mortgages. Gilt yields help determine borrowing costs throughout the economy. Higher government borrowing costs feed into business loans, commercial property finance and the rates faced by households refinancing existing debt. They also raise the government’s own interest bill, leaving less money available for public services or requiring still more taxes and borrowing.

This creates a fiscal trap. Burnham can announce subsidies intended to lower visible prices, but if investors conclude that those subsidies are not credibly financed, the resulting rise in interest rates can increase households’ much larger housing and credit costs.

Eventually, Burnham must reconcile his ambitions with the fiscal rules. There are only three broad possibilities: faster economic growth, higher taxes or lower spending.

Faster growth would be the least painful solution, but it cannot simply be assumed into existence. Policies that enlarge the state, weaken investment incentives or create uncertainty over future taxation may leave the economy less capable of growing out of its debt burden.

That leaves taxes and spending.

My recent research, using narrative fiscal-consolidation data covering 17 advanced economies between 1978 and 2016, shows that the choice between them matters enormously. Tax-based adjustment significantly harm economic growth, and after five years, tax-based consolidations are associated with cumulative growth losses approaching three percentage points.

The debt results are even more striking. A spending cut equal to one percent of GDP raises the probability of reducing the debt ratio by at least five percentage points within three years by approximately 11 percentage points. A tax increase of the same size lowers the probability of success by around 9.5 points.

The implication is uncomfortable for a Labour government with an expansive domestic agenda. Complying with the fiscal rules on paper through tax increases may not produce durable debt reduction. Higher taxes can weaken work, saving and investment while allowing the underlying spending trajectory to continue.

Spending restraint, by contrast, can signal that the government has permanently altered that trajectory. It can reduce expectations of future taxation, make room for private investment and convince bondholders that fiscal discipline will survive beyond the next forecast.

Not every spending cut is equally desirable. The evidence generally favors restraining transfers and government consumption rather than sacrificing productive public investment. But the broader conclusion is difficult to avoid: A government cannot credibly promise every new program, preserve every existing one and expect financial markets to finance the difference cheaply.

Burnham wants to be remembered as the prime minister who brought down the cost of living. Whether he succeeds may depend less on the subsidies he announces than on the spending promises he is willing to abandon.

The gilt market will be watching.