Andy Burnham has sent borrowing costs soaring as he vowed to exploit ‘any flexibility’ in the fiscal rules before naming John Healey Chancellor of the Exchequer.
The yield on ten-year gilts – a key measure of how much it costs the UK government to borrow – rose above 5.04 per cent yesterday afternoon as investors fretted over the new Prime Minister’s tax and spending plans.
It slipped to 5.03 per cent in early trading this morning amid ongoing nervousness about Mr Burnham’s ability to fund his spending spree.
It puts the yield over the 5 per cent level that until this spring had not been breached since 2008 – and well above the levels seen under Liz Truss.
The rise in UK borrowing costs was the fastest in the G7 in what Rupert Harrison, an advisor to George Osborne when he was Chancellor, described as ‘some early warning signs from the gilt market for Andy Burnham’.
It already costs Britain more to borrow than any other country in the G7 as investors demand more to lend to the UK than to the United States, Canada, Germany, France, Italy and Japan.
John Healey is appointed Chancellor of the Exchequer by new PM Andy Burnham
Higher government borrowing costs feed through to mortgages and business loans – piling pressure on household finances and corporate profits.
Investors are fretting over Mr Burnham’s economic plans and what Mr Healey will announce in his first Budget expected this autumn.
It follows the sacking of Rachel Reeves, who also presided over a sharp rise in borrowing costs as Chancellor despite being seen as relatively ‘market-friendly’ due to her adherence to the fiscal rules.
The appointment of Mr Healey comes after weeks of speculation that the job would go to either Ed Miliband or Shabana Mahmood.
Mr Healey quit Sir Keir Starmer’s government last month in a row over military spending.
He will now be charged with finding the money to fill a hole in the defence budget that Ms Reeves refused to fill.
In his first speech as Prime Minister, Mr Burnham promised ‘to give people some breathing space, now, some help with the cost of living’ but at the same time ‘meet our fiscal rules’.
He later added: ‘I’ve said we’ll stick to the fiscal rules, and by that I mean the existing fiscal rules, and use obviously any flexibility within them.’
The comments fuelled fears he is planning a fresh round of tax hikes and more borrowing to fund increased spending – potentially triggering an adverse reaction on financial markets.
Matt Amis, investment director at Aberdeen, said talk of ‘using flexibility in the fiscal rules seems to have got the market’s attention.’
He added: ‘It just shows this week in particular the language from the Burnham administration, the new chancellor, is going to be key here. The gilt market is on edge.’
Mohamed El-Erian, chief economist advisor at Allianz and a bond market expert, said: ‘Once again, the UK is experiencing the largest move in government bond yields. This coincides with the new Prime Minister, Andy Burnham, recommitting to existing fiscal rules while also seeking “flexibility” within them.’
Analysts said the reaction could have been worse had Mr Miliband been appointed Chancellor – but warned of uncertainty in the months ahead.
Enrique Díaz-Alvarez, chief economist at global financial services firm Ebury, said: ‘The lack of policy detail from the new premier casts a pall of uncertainty over British assets.’
Stuart Widdowson, a fund manager at Odyssean Investment Trust, said: ‘Each shift in leadership brings fresh uncertainty over tax, spending and regulation, and summer 2026 looks no different.’
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