Burnham return attempt ushers new borrowing cost record
Manchester mayor Andy Burnham’s attempt to return to parliament has alarmed traders as gilt yields reached another 28-year high, beating last week’s high.
Burnham overcame the first hurdle on his path towards becoming Prime Minister after Josh Simons, the MP for Makerfield, announced he would resign on Thursday night to let the Manchester mayor try and stand for Labour.
Traders appeared to have an adverse reaction to the news of Burnham’s potential return.
The value of the pound declined against the euro and Japanese yen, making Brits poorer compared to counterparts in G7 countries. Sterling dropped against major currencies, falling by 0.2 per cent against the US dollar.
Bond vigilantes also sold gilts en masse as trading opened on Friday, with UK government bond yields rising across the curve.
Ten-year yields, the main benchmark for UK government borrowing costs, jumped by as much as 0.1 percentage point, rising above five per cent once again.
Longer term gilt yields also rose higher to 5.78 per cent, edging closer to the 27-year highs seen last week.
Those 30-year gilt yields soared to its highest level since 1998, beating even last week’s record that reflected investors’ concerns before local elections.
The rise in gilt yields over one day could add billions of pounds to government borrowing costs. Debt interest payments already amounted to around £110bn over the last financial year, equivalent to 8.1 per cent of total public spending and nearly double the defence budget.
Burnham’s fiscal rules
Burnham’s return to parliament has worried UK government bondholders and other investors given his recent criticism of the current Labour government’s fiscal stance.
Rachel Reeves loosened fiscal rules to allow for £140bn more in borrowing over five years.
But the current Manchester mayor criticised the government for being “in hock to the bond markets”. An ally of his, the backbencher Paula Barker, said markets would have to “fall in line” with Burnham’s policies if he became Prime Minister.
Burnham has also promised to nationalise several areas of the economy including water, energy utilities and transport networks.
He attempted to ease market concerns by suggesting he would maintain the same fiscal rules but allow a carve-out for defence spending.
The path back
Burnham, who sat in Gordon Brown’s Cabinet and once attempted to become Labour leader before losing to Jeremy Corbyn in 2015, now faces several more hurdles to become Prime Minister.
He must win the approval of the Labour Party’s National Executive Committee, on which Sir Keir Starmer sits, to be able to stand for the seat, as well as get the go–ahead from local party activists.
The Labour veteran would then have to win the by-election in Simons’ former seat, although it is heavily targeted by Reform UK.
After a potential return to parliament, Burnham would have to get the backing of Labour MPs to stand for leader and later win the backing of unions and party members before he can oust Starmer and become Prime Minister.