Andy Burnham wins in Makerfield - what next? And what’s in store for gilts and sterling?

Andy Burnham won an outright majority in the Makerfield by-election, setting up a likely bid to replace Keir Starmer as the Labour leader and become the next Prime Minister.

The, I guess soon-to-be-former Mayor of Manchester won 55% on an increased turnout, leaving Reform on 35% of the vote. He has doubled the majority for Labour even as the Party’s vote has crumbled in the rest of the country. 

The dust has barely settled but the strength of his victory is a key factor now as it lets Labour MPs think that they can hold onto their seats at the next General Election if they have Burnham as their leader. The level of victory represents a powerful personal mandate for his style of politics and his agenda, which encompasses a broad range of economic policies that we will need to examine in more depth in due course. Of course, it’s remains to be seen whether the King of the North can win over the hearts and minds of the rest of the country, but for now the focus is on what Prime Minister Burnham means for investors and what the likely next steps are.

What next?

Officially, Burnham could drop the gauntlet at Starmer’s feet immediately, though senior allies have said he’d wait at least 72 hours. I would contend that a Monday morning announcement would make more sense than a Friday lunch panic. 

There are now likely to be more resignations and letters sent to Starmer to stand down. Burnham would likely prefer a coronation than a street fight – though it seems certain to me that he will become the next prime minister of Britain within weeks.

How long? Starmer says he will stand in any leadership contest – at least that was his view as of Friday morning. It could take about 12 weeks from whenever a contest is triggered.

Who’s going to be Chancellor?

So, we assume Burnham is PM - his choice of Chancellor will determine how the market initially views the economic credibility of his regime – he'll know that a credible, ostensibly fiscally responsible candidate would send the ‘right’ signals to the bond market. He knows the reverse is also true. It seems unlikely he would retain Rachel Reeves. Ed Miliband has been talked about and likely seen as gilt/sterling negative by raising risks of fiscal excess. His adherence to net-zero-at-all-costs is hardly confidence-inspiring when the economic needs are such as they are today. Wes Streeting has been mentioned – a candidate more from the right of the party. Our friends at BlondeMoney say Miliband is the most likely to be named successor to Rachel Reeves and that he could be installed soon.

Spending and borrowing to rise under Burnham?

We don’t know for sure. Markets may assume higher spending and higher borrowing because of a lurch to the left. But as the current Starmer-Reeves pickle shows, you can make big commitments and become quickly unstuck because of the harsh realities of fiscal rules, tax commitments and markets. I like comments from Professor Rob Ford at Manchester University (cited in the FT) that Burnham was adopting an approach of “big spending vibes, small spending commitments”.

The risk in this approach is repeating the mistakes of the Starmer regime – big promises that are undeliverable, leading to disappointment and a loss of power, credibility and confidence.

The advantage of this approach in the short and medium term is selling the “big spending vibes” to the voting public whilst simultaneously selling the “small spending commitments” to the market. It’s a tough and very narrow line to walk, but it’s one that could successfully contain bond yields.

Fiscal framework and ‘Manchesterism’

So, whilst Burnham has definitely been cast as the least market friendly replacement for Starmer, his more recent comments indicate that he understands he is constrained by a fiscal framework that he is unwilling to shed. He has committed to fiscal rules and tax pledges from the manifesto, and rowed back on some bumper spending plans, for instance on compensation for WASPI women. 

We’re going to hear a lot more about ‘Manchesterism’, which loosely is a blend of devolution and business-friendly socialism (!) coupled with greater public control of public services...it’s not really a worked-out economic doctrine, more a philosophy. People vote for that kind of thing but it’s a liability once in power. 

Features of Manchesterism include things like greater public control of energy, dismantling the for-profit care system and more control over tech platforms. You’d find it hard to describe any of this has cost-neutral. 

Likely moves in gilts and sterling?

As I noted back in May when markets were throwing a wobbly over the Labour leadership news, there was a non-negligible chance that the market could overdo the risks from a Burnham leadership. We saw gilt yields spike to their highest levels in decades – 28-year highs for the 30yr, 18-year highs for the 10yr.

Whilst we may not see quite as much gyration, I wouldn't be surprised if the multi-year/decade highs on the 10yr and 30yr are not tested again as he sets out his policy ideals. The immediate reaction in the market from Burnham’s by-election win was to offer gilts but the moves were contained. 

The macro backdrop today has evolved considerably since May when inflation risks from the Iran war were rising and expectations grew for the Bank of England to hike rates more than once this year. Following this week’s decision by the BOE to hold rates, a softer CPI inflation reading than expected and significant (albeit rocky) progress towards reopening the Strait of Hormuz some of these risks have receded.

But equally, quite apart from the forward-looking projections of what Burnham might do, the inheritance he is likely to assume is hardly looking positive.

As noted in this morning’s note, underlining the headache facing any leader, UK government borrowing rose more than expected in May, up 30% year-on-year and some £18.8bn more than forecast. Debt interest spending alone rose to £11.7bn in May. This is a warning to Burnham – the UK is in a very weak fiscal position, so he needs to stick to the fiscal frameworks.

I’ve spoken extensively about what a lurch to the left would mean for gilt markets. The spike in gilt yields in the late spring revealed market angst about a higher borrowing, higher tax government. While the bond market would ultimately enforce fiscal discipline of a kind, we should be ready for that process to be painful. The Bank of England’s slightly more dovish stance and likelihood that it won’t hike rates to combat inflation, stands as a positive, But the risk is populist, expensive promises that spike gilt yields. Burnham is a shrewd operator and will seek to avoid this, but his electoral strength lies in building castles in the sky. 

Therefore, the strength of his mandate may determine how far he might go with anything one might call a market-unfriendly approach – ie higher borrowing, redistributive wealth taxes etc. And his mandate looks strong. 

I think that ultimately the bond market is in charge and will enforce discipline. Burnham himself, from his more recent remarks, seems to get this. The risk for gilts and sterling would be in the near term if Burnham leans into the ‘big spending vibes’ because that’s what worked in Makerfield. 

On the other hand – if Burnham has already won the hearts and minds of the Labour left, there is little strategic merit in pushing harder on that side. As I noted on 19 May “there's significant cost to a leftwards lurch and there's a great deal more strategic logic to getting the bond market on side, lower bond yields (and therefore borrowing, creating more headroom) and nixing the fiscal credibility doom loop”. That means continuing to sell the ‘small spending commitments’ to the market while selling those big spending ideas to the voters - the question now is how sustainable is this approach and what gives first? 

As far as sterling is concerned, I see risks still skewed to the downside due to the currency-toxic mix of fiscal risks, political risks and monetary policy divergence.