Britain’s prime minister-in-waiting, Andy Burnham, promises radical change while sticking to the country’s fiscal rules, a strategy that needs discipline, luck, and maybe an old trick: kicking the pain points into the long grass.
Last week, Burnham committed to existing fiscal rules that require the government to match day-to-day spending against revenue — a balanced current budget — a feat achieved only fleetingly in the last 25 years.
So far, Britain’s £2.9 trillion ($3.87 trillion) government bond market has shown little sign of concern, helped by falling oil prices since the de-escalation of the Iran war, but also Burnham’s efforts to burnish an image of fiscal responsibility.
But he has yet to set out how he will square demands for spending and borrowing against his commitments to the fiscal rules and the Labour Party’s 2024 manifesto, which ruled out raising taxes on working people.
CURRENT FORECASTS BASED ON PRE-WAR ECONOMY
In March, Britain’s Office for Budget Responsibility estimated that finance minister Rachel Reeves’ plans would meet the rules with a current budget surplus of £24 billion by 2029/30.
But that outlook was based on the economy before the outbreak of war in the Middle East, and above-consensus growth forecasts for the years ahead.
Economists at Bank of America last week estimated that margin had shrunk to £19 billion.
That combination — shrinking headroom and a manifesto that rules out broad tax rises — increases the temptation to do what governments have done before: defer the reckoning.
“The idea that this government might promise fiscal consolidation in the future, while topping up spending plans in the near term, seems quite plausible to me,” said Bee Boileau, senior researcher at the Institute for Fiscal Studies, a think tank.
Reeves’ reforms to the fiscal framework, including comprehensive spending reviews every two years, have made gaming the fiscal rules harder, but not impossible.
Her Conservative Party predecessor Jeremy Hunt set the modern template: his March 2024 Budget contained pre-election tax cuts to be paid for by large, unspecified real-terms cuts to government departments in later years.
HOW TO GAME THE FISCAL RULES
Here’s how a similar ploy could look for Burnham.
Once in power, the new prime minister could publish an initial Budget this year that mostly sticks with current plans, meeting the rule to balance the current budget in the 2029/30 financial year while teeing up his defining Budget in 2027.
From April 2027, the three-year target to balance the budget will shift to 2030/31, which will give Burnham the chance to shift fiscal consolidation past the next election, due in mid-2029 at the latest, while potentially increasing near-term spending.
A biennial review of government spending due next year represents a potential complication. Burnham will be required to set government department budgets for the post-election 2030/31 financial year, and cuts would look politically difficult.
But for a pre-election Budget 2028, Burnham could again postpone fiscal consolidation to 2031/32, this time without specifying where the axe will fall, because that year will fall outside the scope of the Spending Review 2027 for departmental budgets.
GILT MARKET HAS LOW TOLERANCE FOR FISCAL RULE GAMES
The trouble is, the gilt market’s tolerance for these strategies may now be limited, said Emma Moriarty, portfolio manager at CG Asset Management, which specialises in fixed income.
“Meeting the fiscal rules is a necessary but not sufficient condition for the bond markets,” Moriarty said, adding that gilts had to be viewed in the context of a crowded sovereign debt market, where competition for buyers is strong.
Some argue there is still room to borrow more.
Jim O’Neill, a former British government minister who was chief economist of Goldman Sachs and has recently advised Burnham, has argued that Britain should borrow more to boost infrastructure — something the fiscal rules would allow for.
But Moriarty said the market would still be focused on the bottom line, whatever the stated purpose of the borrowing.
“For gilt investors, the purpose of borrowing matters less than the volume — what moves markets on Budget day is the Debt Management Office’s issuance remit, not the Chancellor’s justification for it,” she said.
Boileau advised against running down the buffer against the fiscal rules, saying the Iran war had already likely eroded it.
“We’ve seen the bad consequences of operating with very little buffer against the fiscal rules in the past, where the government has been forced into big policy changes as a result of relatively small changes in the fiscal forecast,” she said.
“We shouldn’t necessarily be changing policy immediately to account for shocks — we want to be able to absorb them without changing policy.”
For now, Moriarty said CGAM was taking a “defensive” stance towards British bonds, favouring short-dated paper and inflation-linked bonds over long-dated conventional debt.
“We’re basically trying to protect ourselves from inflation, and we’re trying to limit capital losses from any kind of potential negative gilt market shock around developments coming from the Burnham government,” she said.
($1 = 0.7492 pounds)
(Reporting by Andy Bruce）
