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Thanks for following our coverage of the latest market reaction to Andy Burnham’s by-election victory.
Investors are concerned that a Burnham premiership would led to higher spending as Britain grapples with a fragile fiscal position.
A quick look at the markets before we go shows the pound has risen 0.2pc against the dollar at $1.32, and up slightly versus the euro at €1.15.
You can stay up to date with the latest here.
Geopolitical uncertainty rattles markets
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The postponement of planned US-Iran deal talks in Switzerland rattled global markets on Friday.
Europe’s STOXX 600 slide 0.2pc lower, as losses in mining stocks weighed on the index.
In France the CAC 40 declined 0.6pc and Germany’s DAX 30 dropped 0.2pc.
In the UK, investors also weighed up renewed political uncertainty as Andy Burnham’s by-election win cleared the way for him to mount a leadership against Sir Keir Starmer.
However, London-listed energy giants rose as oil prices climbed higher on renewed tensions in the Middle East. Shares in BP gained 2.8pc and Shell added 1.1pc.
Brent crude, the international benchmark, rose to $80.70 a barrel on Friday evening.
Political uncertainty weighs on UK stocks
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Fresh political uncertainty following Andy Burnham’s by-election victory and renewed tensions between Iran and the US weighed on London-listed stocks this week.
The FTSE 100 has lost 1pc since Monday, clocking in the steepest weekly loss since early May, as the prospect of a Labour leadership contest put pressure on London’s blue-chip index.
Government borrowing costs rose higher over concerns that Mr Burnham would unveil higher spending and borrowing if he ousted Sir Keir Starmer.
The yield on 10-year gilts, as UK bonds are known, rose by 0.09 percentage points to close at 4.84pc.
Markets close lower in London
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Stocks in London have ended the day lower as traders reacted nervously to Andy Brunham’s by-election win and the latest geopiltical developments in the Middle East.
The FTSE 100 shed 0.4pc, with heavy losses from mining companies weighed on the blue-chip index.
The more domestically-focused FTSE 250 lost 0.6pc.
Shares in UK water companies dropped after Mr Burnham’s by-election victory following his calls for nationalisation.
United Utilities lost 1.2pc, Severn Trent shed 1.8pc and and Pennon Group, the owner of South West Water, declined 0.8pc.
Fragile fiscal position to constrain spending pledges
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The UK’s challenging fiscal position means that any new spending commitments from Mr Burnham will have to be small, explains Capital Economics.
Ashley Webb, senior UK economist at Capital Economics, said: “The UK’s fiscal position is fragile and it will constrain the PM and Chancellor.
“So while there may be plenty of talk of big spending rises, the reality is that there will probably be only small spending commitments.”
If Mr Burnham dethrones Sir Keir Starmer as Labour leader he will be faced with the same set of fiscal challenges, as the UK grapples with a rising debt interest bill and a weak economy.
New figures released on Friday underscored the scale of the fragile state of the nation’s public finances.
Record debt interest payments pushed up public borrowing to £23.3bn last month – well ahead of forecasts of £18.9bn and the highest deficit for any May since the pandemic.
Burnham premiership could push up government borrowing, says Capital Economics
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Andy Burnham’s proposed tax hikes on wealthy Britons are unlikely to fully fund his planned spending increases, says Capital Economics.
Ashley Webb, Senior UK Economist at Capital Economics, said: “He [Mr Burnham] would probably be more interventionist than Starmer, with both higher spending and higher taxes.
“But his proposed tax hikes on the wealthy are unlikely to generate enough revenue to fully fund his planned spending increases, especially given the growing political pressure to increase defence spending.”
Mr Webb added that this would mean that government borrowing would be higher than is currently forecast.
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Burnham risks ‘repeating Starmer’s mistakes’ on tax
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Andy Burnham risks making the same mistakes as Sir Keir Starmer if he nationalises industries, a private bank has warned.
Berenberg said the new Makerfield MP could trigger a fresh surge in employment costs by trying to redistribute income with government policy.
The Prime Minister and Chancellor Rachel Reeves have been criticised for their hikes to National Insurance contributions and the minimum wage, which employers say has made it more difficult to hire staff. Youth unemployment hit an 11-year high of 16.2pc in the first quarter.
Berenberg chief economist Holger Schmieding said: “Despite some instances of natural monopolies where UK privatisation has clearly failed, Burnham’s call to ‘roll back the 1980s’ goes too far.
“UK economic growth outstripped that of its peers in the 1990s and 2000s, helping Tony Blair’s Labour administration win three consecutive general elections.
“Widespread voter disillusionment is a more recent phenomenon, which we attribute to the stagnation in GDP per capita over the past decade, not how income is distributed.
“The risk is that Burnham makes similar mistakes to Starmer in an attempt to redistribute income to lower earners and enlarge the state.
“High borrowing and the April 2025 hikes in the minimum wage and payroll tax boosted inflation and led to a steep rise in the cost of employment that made many jobs unviable.”
The bank added Mr Burnham would be quickly brought to heel by the bond markets if he tries to loosen the public purse strings to fund his plans.
Mr Schmieding said: “If he decides to try to borrow more by loosening the fiscal rules, the bond market will impose discipline by demanding higher yields.”
Interest rates to stay on hold over ‘renewed political uncertainty’
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The Bank of England will keep interest rates on hold amid the “renewed political uncertainty” created by Andy Burnham’s return to Parliament, an investment bank has said.
Peel Hunt has abandoned its forecast that rates would be cut twice this year and instead expects policymakers to keep rates at 3.75pc. It then expects two rate cuts in February and April next year.
Chief economist Kallum Pickering said UK growth was “surprising to the upside”, justifying holding rates even as “inflation pressures caused by the US–Iran war have not run as hot as the Bank of England had feared”.
He said: “Combined with renewed political uncertainty stemming from a likely Labour leadership election, resilient momentum is likely to encourage policymakers to sit tight for longer than we previously expected until policy uncertainty eases and inflation starts to fall towards the 2pc target on a sustained basis.”
Burnham wipes £375m off water companies
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Shares in UK water companies have fallen after Andy Burnham’s by-election victory following his calls for nationalisation.
As much as £375m has been wiped off the combined value of United Utililities, Severn Trent and South West Water owner Pennon Group over expectations the new Makerfield MP will challenge Sir Keir Starmer.
Mr Burnham has called for debt-laden Thames Water to be nationalised and said there should be “stronger public control” of industries such as energy, housing, water and transport.
Shares in water companies were down between as much as 0.9pc and 1.9pc.
What a Burnham premiership could mean for your money
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Andy Burnham has won a resounding victory in the Makerfield by-election, meaning that he is one step closer to challenging Sir Keir Starmer for his place in No 10.
The former mayor of Greater Manchester secured an absolute majority in Thursday’s vote, surpassing second place Reform UK by more than 9,000 votes.
Mr Burnham confirmed his intention to run for prime minister in front of a televised audience on Question Time earlier this month.
And in his victory speech in the early hours of Friday morning, Mr Burnham described the vote as a “loud cry for change”.
But change often comes at a price – and the bill could once again land with Britain’s already squeezed middle class.
Here’s what a Burnham premiership could mean for your money.
Burnham spending spree ‘may delay rate cuts’
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The Bank of England could be forced to delay interest rate cuts if Andy Burnham were to loosen Rachel Reeves’s fiscal rules to increase government spending, Goldman Sachs has warned.
The Wall Street bank said policymakers might push back reductions in the Bank Rate if the new Makerfield MP were to become prime minister.
Goldman expects the Bank of England to keep rates on hold at 3.75pc this year before resuming cuts in 2027 as the inflation shock from the Iran war proves less severe than feared.
Its prediction is significantly more optimistic than pricing on money markets, which indicate interest rates will rise to 4pc by the end of the year.
However, the bank said this could change as a Burnham government faces more pressures on government spending, including on defence, public investment and social care.
Sven Jari Stehn, an economist at Goldman Sachs, said: “A slower fiscal consolidation under a Burnham government could provide additional demand support and might thus delay Bank of England rate cuts.”
Government borrowing costs have risen at the fastest pace in Europe in the wake of Mr Burnham’s by-election victory.
He has committed to keeping within the fiscal rules, which are designed to reduce borrowing over time, but also called for a “reindustrialisation across the North” and stronger public controls on water and energy bills.
Mr Stehn said: “This would require higher revenues to achieve the required fiscal adjustment.
“But the OBR would probably not ‘score’ tax increases on capital gains or wealth favourably, pointing to risks of higher near-term deficits.”
Burnham spending plans ‘to come after Budget’
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Andy Burnham is unlikely to rip up Rachel Reeves’s fiscal rules before the autumn budget as higher borrowing costs squeeze the Chancellor’s headroom, economists have said.
The cost of UK government borrowing has risen at the fastest pace in Europe after Mr Burnham’s by-election victory, which will likely limit his room for manoeuvre, according to Oxford Economics.
In addition, he is unlikely to have time to develop detailed plans if he has to focus on a leadership contest against Sir Keir Starmer, the advisory firm said.
Senior economist Edward Allenby said: “Events have moved fast and there’s little to suggest Burnham’s team has a detailed policy package already in the works.
“Developing that package in time for the autumn Budget will be made even harder if Burnham has to win a prolonged leadership contest first.”
“However, Burnham will also be operating with limited fiscal space.
“Some of the existing headroom will likely be eroded by higher gilt yields and market expectations for Bank Rate.
“And given some nervousness in markets about Burnham’s approach, we suspect the new leadership will err on the side of caution and opt against tweaking the fiscal rules in the near-term. s a result, any changes to the government’s current consolidation plans are likely to be announced after this year’s Budget.”
What Andy Burnham’s victory means for Britain’s debt interest bill
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Andy Burnham has edged one step closer to dethroning Sir Keir Starmer and becoming Britain’s fifth prime minister in six years.
But while many soft-Left Labour MPs may regard Burnham’s return to Westminster as the second coming, he faces an uphill battle of winning over a far tougher audience: the bond markets.
The world of bond trading desks – populated by people who buy and sell government debt – has spooked leaders for decades.
Liz Truss found that bond vigilantes can bring down governments, while James Carville, Bill Clinton’s political strategist, once said that if he were reincarnated he would come back as the bond market because “you can intimidate everybody”.
Britain ‘cannot afford summer of speculation’
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Britain needs a strong and stable government rather than the uncertainty created by a lengthy Labour leadership contest, the head of one of Britain’s biggest business groups has warned.
Rain Newton-Smith, chief executive CBI, warned business confidence would be damaged if politicians “are distracted by internal party dynamics” following Andy Burnham’s victory in the Makerfield by-election.
Sir Keir Starmer has said he would stand in any contest aimed at replacing him as prime minister.
Ms Newton-Smith said: “The UK cannot afford a summer of speculation and drift while politicians are distracted by internal party dynamics. The government must remain focused on delivery and implementation.
“For strong, stable economic growth you need strong, stable, consistent government. Political uncertainty dampens business confidence and investment, impacting job creation, wages and the cost of living.
“We need a government that is focused on the future, and getting on with the job of governing. Business needs to know that the government can take big decisions, will deliver on its commitments and is prepared to tackle the rising costs of doing business.”
FTSE 100 falls amid political uncertainty
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UK stocks declined as Andy Burnham’s by-election victory cleared the path for a Labour leadership contest.
The FTSE 100 was down 0.3pc, with the domestically focused FTSE 250 dropping 0.7pc, as Sir Keir Starmer said he would stand if anyone launched a challenge to replace him as prime minister.
Global shares were lower after the US and Iran called off peace talks in Switzerland.
However, UK stocks were the worst performers in Europe as the prospect of a new Labour leader raised concerns about the sustainability of any new government spending plans.
Mark Dowding, chief investment officer at RBC BlueBay, said: “We see the Labour Party making a more decisive shift to the Left, embracing policies of increased spending and inflation in the months to come as Burnham seeks to implement his vision for the country.
“Although he has avowed to stay within fiscal rules, it appears that he may try to tweak these by extending the period over which analysis is performed, in order to backload fiscal tightening and therefore spend more money up front in the next couple of years.
“We also suspect there will be a push to move some spending (such as infrastructure projects and incremental defence spending) off balance sheet and thus mobilise additional capital. However, we are wary that sceptical markets will look through such moves as delivering additional fiscal easing via the back door.
“In this case, there is a risk that his credibility could be tested by the market.”
Retail sales rebound after hot weather
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In a sliver of good news for Sir Keir Starmer, official figures show UK retail sales bounced back last month as department stores and online retailers were buoyed by hot weather
The Office for National Statistics (ONS) said the total volume of retail sales, which measures the quantity bought, increased by 1.2pc in May.
It compared with a decline of 1pc in April as consumers battened down the hatches over the Iran war. It was also stronger than the 0.5pc expected.
Jacqueline Windsor, head of retail at PwC UK, said: “At face value, retail sales surprised on the upside in May.
“However, last month benefited from both a weak comparable period, with May 2025 seeing a decline in sales as shoppers brought forward their spring purchases following an unusually warm March and April; and the heatwave coinciding with the bank holiday and half-term towards the end of the month, which helped the sales of everything from barbecue foods and summer fashions, to fans and paddling pools.
“The high street itself did not benefit, though, with footfall declining and online retailers reaping the rewards.”
Agatha Christie hotel owner welcomes Burnham win
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The owner of a historic hotel known for its association with Agatha Christie welcomed the election of Andy Burnham after his call to cut VAT for hospitality businesses.
Giles Fuchs, chief executive of Grade II listed Burgh Island hotel, which sits on a private island near Plymouth, said it would “a real difference” if Mr Burnham followed through with his promise after backing plans to lower the tax from 20pc to 10pc.
He said: “Hospitality has been treated like Westminster’s whipping boy for too long, with pubs, hotels and restaurants hit from every angle by rising staffing costs, energy bills, business rates and supply pressures.
“Hotels such as ours want to hire more people, especially young people trying to get their first step on the career ladder, but the current cost burden makes that far harder than it should be.
“That said, the sector has heard warm words before, so this has to move from just being a campaign promise to practical delivery.
“At a time when youth unemployment remains a serious concern, easing the pressure on hospitality could help businesses create more entry-level jobs, offer better training and give young people real prospects in their local communities.”
He added: “If Burnham is serious about giving the industry breathing space, then this could be the start of making a real difference.”
Burnham wants to bring down water and energy bills
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Andy Burnham said the Government needs to bring down water and energy bills like he brought down bus fares as Mayor of Greater Manchester.
Addressing political campaigners at the home ground of Ashton Town FC, he said there needed to be a “reindustrialisation across the North” as part of an “economy that works for everybody”.
Mr Burnham introduced a £2 cap on bus fares during his time as Manchester mayor, which he plans to roll out across the country. He has previously called for “stronger public control” of essential services like water and energy.
He added that Britain needed to also move away from an education system “dominated by the university route”.
He told supporters: “We have an opportunity to turn the tide to make the country feel like it’s working again, to make people see that politics can make a positive difference to make people feel hope again.”
Burnham likely to break fiscal rules, warns JP Morgan
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The world’s largest investment bank has warned that Andy Burnham is likely to renege on promises to leave Rachel Reeves’s fiscal rules intact if he becomes prime minister.
The fiscal rules would severely restrict Mr Burnham’s room for manoeuvre, but are also seen as crucial to keep bond investors onside.
Allan Monks at JP Morgan said: “We see a high risk that he would consider a change to the fiscal rules, despite appearing to rule this out in recent weeks.”
Mr Monks said that if done carefully, Mr Burnham could potentially tweak the rules without sparking market turmoil.
It comes as it emerged that the new Makerfield MP has enlisted former Bank of England chief economist, Andy Haldane, as his adviser.
The former Threadneedle Street top official has long advocated overhauling the fiscal rules and boosting regional growth through greater investment, a cause close to Mr Burnham’s heart.
Mr Monks said: “He would need to tread carefully given market pressure, but a change motivated to allow more growth-enhancing investment spending could work if communicated in the right way. This would receive some support from a range of economists and think tanks.”
Mr Burnham is also constrained by Labour’s manifesto pledges ruling out increasing any of the major revenue-raising taxes. However, he could look to target wealth and large businesses.
Mr Monks said: “Burnham has hinted at a willingness to consider property and wealth taxation, but with no clear details.
“We think increases to the main tax rates ruled out in the manifesto are unlikely, not least because of the impact on the party’s popularity going into the next election, but if one tax were to be increased from that list, corporation tax might be the more likely.”
Burnham ‘yet to show willingness to say no’
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Andy Burnham has unsettled markets because he has not shown willingness to say no to pleas for more public spending.
James Carter, co-head of fixed income at asset manager W1M, said the new Makerfield MP would need to raise taxes or cut spending elsewhere if he wanted to maintain the pensions triple lock or reform student loans.
Mr Burnham drew fire from Labour MPs after saying the women affected by changes to the state pension age – dubbed the Waspi campaigners – “deserved” to be compensated. He later ruled out compensation.
Mr Carter said: “Whether on politically sensitive issues such as the triple lock, Waspi compensation or student loan reform, he has yet to demonstrate a clear willingness to say ‘no’.
“That sits uneasily with a market increasingly focused on limited fiscal headroom.”
“The UK faces a large debt stock, elevated borrowing costs and limited fiscal flexibility. Gilt yields remain the highest in the G7, reflecting both structural pressures and an embedded political risk premium.
“In this environment, policy choices are constrained. Any increase in spending would need to be offset through higher taxation or credible reprioritisation.”
Starmer: I will stand against Burnham
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Sir Keir Starmer has insisted he “will stand” against Andy Burnham in a future Labour leadership contest.
The Prime Minister said he would not “walk away” if Mr Burnham moved against him after winning the Makerfield by-election.
The cost of government borrowing has risen further at the prospect of political uncertainty, with the yield on 10-year gilts up from 4.76pc to 4.82pc.
However, the pound was last up 0.2pc against the dollar at $1.322, recovering from overnight losses of as much as 0.3pc following Mr Burnham’s victory.
The Labour Mayor of Greater Manchester is widely expected to launch a challenge on returning to the Commons next week.
Mr Starmer earlier congratulated Mr Burnham on his win in Makerfield, saying “voters chose Labour’s campaign of hope and optimism over division and hate”.
Dominic Penna and Pieter Snepvangers have the latest on the political developments following the by-election.
Pound ‘vulnerable’ after Burnham victory
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The pound is “vulnerable” to a fall in value as Andy Burnham has shown little commitment to reducing public spending, an investment bank has warned.
Sterling has fallen below $1.32 against the dollar for the first time since April as the new Makerfield MPs prepares to challenge Sir Keir Starmer for the Labour leadership.
Modupe Adegbembo, an economist at Jefferies, said a range of factors could hit the pound, including expectations of higher interest rates from the US Federal Reserve and the European Central Bank (ECB).
She said: “Sterling remains vulnerable. A combination of UK political uncertainty, a relatively hawkish Fed backdrop and a dovish Bank of England should continue to weigh on the pound against the dollar.
“We also see value in the euro against the sterling, given continuing hawkish rhetoric from the ECB supporting the euro to strengthen vs the pound.”
She added that there was scope for the cost of government borrowing to rise further as “political risk is repriced and markets test fiscal credibility under a potential leadership transition”.
Ms Adegbembo added: “For markets, the key question is whether this political shift translates into a change in the policy framework.
“Under Burnham, his comments suggest the overarching macro framework would be largely unchanged.
“He has committed to existing fiscal rules and manifesto tax constraints, underscoring the limited room for policy easing.
“At the same time, he has provided little indication that he would seek to reduce public spending, having already pledged to keep the pension triple lock and, at times, signalling support for policies with a significant fiscal cost, such as compensation for WASPI women (though he later ruled out compensation).
“While he has shown some willingness to adjust policies, we continue to think the thrust of policy remains constrained by the fiscal backdrop.”
Rayner as chancellor ‘would be irresponsible’
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We will soon find out if Andy Burnham has bitten off more than he can chew as the government borrows money just to pay for the cost of the national debt, Telegraph readers have said.
Others have raised questions about whether Angela Rayner or Ed Miliband should be chancellor in a government run by the new Makerfield MP.
Here are some of the views from the comments section below, and you can join the debate here.
‘Questions remain’ over ability to reduce Treasury borrowing
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Matt Swannell, chief economic adviser to the Item Club, warned the Iran war impact will take its toll on the public finances, despite an initial peace deal having been signed by the US and Iran.
Public sector borrowing surged in April and May as the Middle East conflict pushed up oil and gas prices, and in turn the cost of government borrowing, which is impacted by inflation fears.
Mr Swannell said: “With a ceasefire reached, energy prices have fallen back but are still higher than before the conflict.
“Weaker growth could weigh on tax revenues, while higher inflation and market interest rates will increase debt interest payments.”
He added: “The Government’s primary fiscal rule commits it to ensuring that it’s only borrowing to invest by 2029-2030.
“In its spring forecast, the OBR estimated that this would be met by a healthy margin.
“But several questions remain over whether the current plans will be sufficient to reduce public borrowing.”
Headroom ‘looks pretty small’ for Burnham chancellor
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Andy Burnham faces a “very tough fiscal landscape” if he becomes prime minister, an economist has said, as the headroom in the public finances is eaten away by rising debt payments.
The Treasury borrowed £5.6bn more than the OBR’s forecasts in May as the Iran war pushed up the cost of servicing the national debt.
Sonali Punhani, UK economist at Bank of America, told Bloomberg TV: “Whoever is the prime minister, the fiscal space is fairly limited.
“The headroom already looks pretty small for whoever is the next chancellor and the next prime minister and then on top of that obviously there are quite a lot of ambitions to increase public spending, so clearly it’s a very tough fiscal landscape for whoever is chancellor.
“Andy Burnham has reassured markets for now that fiscal rules are likely to be met, which is obviously keeping markets onside.
“We expect that in the near-term because any potential adverse market reaction to tweaking the fiscal rules could be not met very well.”
Burnham’s choice of chancellor ‘critical’ for bond markets
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Andy Burnham’s choice of chancellor would be “critical” to keep borrowing costs from rising sharply, analysts have warned after the former Manchester mayor’s by-election victory.
Mr Burnham has sought to calm investors by stating he is committed to Rachel Reeves’s fiscal rules, which aim to bring down borrowing over time.
He has revealed that he is being advised by former Bank of England chief economist Andy Haldane, former Goldman Sachs economist Jim O’Neil and the former head of the OBR, Richard Hughes.
Roger Lee, head of equity strategy at investment bank Cavendish, said: “With a leadership campaign ahead there is still a risk that he is forced to make spending commitments that could concern the bond market and his choice of chancellor if he becomes PM will also be critical for the market especially if it is a perceived high spender like Miliband or Rayner.”
Mr Lee warned Mr Burnham faces a “fiscal straight jacket”, illustrated by the latest public sector borrowing figures, showing Treasury borrowing in May was 30.4pc higher than the same month last year.
He added: “There is limited capacity to increase borrowing or raise significant incremental tax revenue if Burnham honours the manifesto commitments as he has indicated.”
End political uncertainty so we can build new homes, say investors
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Property developers have called for a swift Labour leadership contest to clear the way for the construction of new homes in Britain.
Vanessa Hale, chief executive at Real Estate:UK, said: “Andy Burnham’s Makerfield win means that we are now heading for a Labour leadership contest over the summer.
“This further political uncertainty will do little to unlock the domestic and global capital required to build the homes, infrastructure and economic growth that the country desperately needs.
“With viability challenges meaning that building activity across the country is stalled, it is imperative that we move as quickly as possible back to a more stable, predictable policy environment so that we can work together across the public and private sectors to support delivery of the Government’s commitment to deliver new homes, grow the economy and revitalise town centres.”
UK stocks fall after by-election result
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The FTSE 100 fell at the open after Andy Burnham won the Makerfield by-election.
The UK’s flagship stock index was down 0.1pc in early trading at 10,388.57 as the Britain prepares for the former Mayor of Greater Manchester to launch a leadership challenge against Sir Keir Starmer.
The domestically focused FTSE 250 declined by 0.2pc to 23,278.41.
Stocks have also been dragged down by a jump in oil prices after Switzerland said US talks with Iranian negotiators on a pact to end the Middle East conflict would not take place on Friday.
Borrowing costs rise after Burnham victory
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The cost of government borrowing rose at the fastest pace in Europe after Andy Burnham won the Makerfield by-election.
The yield on 10-year gilts, a benchmark for what the Treasury pays to borrow money, climbed from 4.76pc to 4.8pc as trading began in London.
The rise of around 0.04 percentage points was ahead of gains of around 0.03pc in France, Germany and Italy and outpaced all European bonds.
Mr Burnham has raised concerns about his commitment to Rachel Reeves’s fiscal rules with comments about Labour being too “in hock” to the bond markets.
Miliband or Rayner pose ‘risk’ to markets as Burnham’s chancellor
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Markets will become “anxious” if Andy Burnham were to appoint Ed Miliband or Angela Rayner as chancellor, an economist has warned.
Simon French of Panmure Liberum said the two Left-leaning candidates would raise concerns that Labour would “deviate” from Rachel Reeves’s fiscal rules designed the lower borrowing over time.
He expects a limited reaction initially in markets to the new Makerfield MP, who is expected to challenge Sir Keir Starmer as Labour leader.
However, he warned of a trio of risks for markets, including if Mr Burnham called a general election, made big spending pledges in a leadership contest, or hired a Left-leaning chancellor.
Mr French said: “A further tail risk is that Burnham tries to reverse-engineer a different form of economic agenda – without a fresh national mandate – and attempts to take on the political and market guardrails alongside a chancellor prepared to deviate from Rachel Reeves’ fiscal rules.
“Either of these approaches would generate a high degree of economic uncertainty, and an unfavourable repricing of UK assets.
“We believe that markets will be particularly anxious should Burnham’s chancellor be associated with recent UK energy policy (Ed Miliband), or its recent labour market/housing policies (Angela Rayner).”
Treasury borrowing surges over higher debt interest payments
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The Treasury borrowed more than expected last month, official data showed, in a sign of the legacy that could be inherited by Andy Burnham if he becomes prime minister.
Public sector borrowing hit £23.3bn in May, according to the Office for National Statistics (ONS), which was £5.4bn more than the same month last year and £5.6bn more than the £17.7bn that had been forecast by the Office for Budget Responsibility (OBR).
It means the Treasury has already borrowed £46.3bn in the first two months of the financial year, which is £8.9bn more than this time last year and £7.7bn more than the £38.6bn forecast by the OBR.
The rise was driven in large part by higher-then-expected debt interest payments, as the Iran war pushed up the cost of borrowing over inflation fears.
Martin Beck, chief economist at WPI Strategy, said the latest data shows Britain’s “deficit is still large, debt interest is still absorbing a painful share of revenue, and the tax burden is already heading for post-war highs”.
He said: “That is why Andy Burnham’s by-election victory matters for the public finances. It does not change the arithmetic overnight, but it changes the politics around the arithmetic.
“A serious Labour leadership challenge would raise a simple question for markets: is the governing party about to shift towards higher spending, looser fiscal rules and a more relaxed attitude to borrowing?
“Burnham’s past argument that governments should not be ‘in hock’ to bond markets may play well politically, but it is not a fiscal strategy.”
Analysts warn investors to ‘watch’ bond markets
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Analysts warned investors to keep an eye on UK bonds, known as gilts, where the cost of government borrowing could be pushed up over concerns about Andy Burnham’s plans for government.
The pound has dropped in a first sign that markets are adjusting to the likelihood of Mr Burnham becoming prime minister.
The new Makerfield MP was already the strong favourite to become the next Labour leader, meaning that likelihood will already be reflected to an extent in the price of assets on financial markets.
After the by-election win, crypto betting platform Polymarket has put his odds of becoming the next prime minister this year at 91pc.
Deutsche Bank analyst Jim Reid said: “The briefings suggest Burnham’s team are hoping for an orderly transition where Starmer stands down, but if Starmer does decide to fight a contest, then he’s automatically on the ballot as the incumbent leader.
“Watch Gilts this morning although they would have been anticipating the Burnham win.”
Good morning
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Thanks for joining me. The pound fell to a two-month low after Andy Burnham secured victory in the Makerfield by-election.
Sterling dropped 0.3pc against the dollar, falling below $1.32 for the first time since April, as the result cleared the path for a leadership challenge against Sir Keir Starmer.
The new MP for Makerfield is expected to initiate the race to replace the Prime Minister in the coming days. However, he has spooked markets with comments hinting at higher spending and borrowing.
Last year, he triggered a rise in borrowing costs after he said Labour must “get beyond this thing of being in hock to the bond markets”.
He has since pledged to remain within Rachel Reeves’s fiscal rules designed to bring down borrowing over time.
The pound has fallen when concerns have been raised about the sustainability of Britain’s public finances, with the national debt on track to surpass £3tn this year.
The Government is expected to borrow more than £100bn to balance the books this year. Here is what you need to know.
5 things to start your day
- Labour opens door to hotel tycoon building Heathrow third runway | Surinder Arora will now press his case for a shorter strip costing £25bn
- Wealthy Britons flee to Isle of Man to escape Reeves’s tax raid | Island receives ‘unusually high levels of interest’ from UK buyers purchasing multimillion-pound homes
- Maggie vs Maga: The battle for the soul of Reform | As Farage’s party fights to capture Makerfield, deep policy divisions threaten its national dream
- Ben Marlow: Don’t be fooled by falling unemployment. Labour has broken the jobs market | More people are claiming out-of-work benefits while fewer are employed in the private sector
- Castore buys 160-year-old Northamptonshire shoe maker | Sportswear brand acquires controlling stake in footwear label Grenson after its sales slump
What happened overnight
Shares retreated in Asia on what will be a quiet day for international markets, with the US and Greater China closed for holidays.
US indexes declined in premarket trading as optimism over the Iran deal to end their war was dimmed by the postponement of high-stakes talks on reopening negotiations over Iran’s nuclear program.
Wall Street will be closed on Friday for the Juneteenth holiday.
Investor sentiment has also been hit by expectations that central banks including the Federal Reserve will raise interest rates to try to curb inflation.
Tokyo’s Nikkei 225 wavered between gains and losses and was little changed at 71,082.81. The government reported that consumer prices excluding volatile fresh foods was unchanged, but analysts said it would likely pick up in coming months despite higher fuel costs.
Higher inflation was a factor driving the Bank of Japan to raise its benchmark interest rate earlier this week to a three-decade high of 1pc as it gradually adjusts its policies after years of near-zero or negative rates.
In South Korea, the Kospi lost 0.5pc to 9,019.22 and the S&P/ASX 200 in Australia declined 1.1pc to 8,818.40.
India’s Sensex lost 1pc.
Markets in Hong Kong, Shanghai and Taiwan were closed for the Dragon Boat festival.