UK’s Starmer faces leadership challenge as rival Burnham becomes MP
British Prime Minister Sir Keir Starmer hosts the first roundtable of regional English mayors with Andy Burnham (R) Mayor of Greater Manchester, at Downing Street on July 9, 2024 in London, England.
Ian Vogler | WPA Pool | Getty Images
Andy Burnham has won a special election to the British parliament, paving the way for him to challenge Prime Minister Keir Starmer for the party leadership.
Burnham, Labour’s former Greater Manchester mayor, defeated the Reform U.K. party by over 9,000 votes, securing nearly 55% of the vote, in the election in Makerfield, in north-west England.
Burnham could now initiate a leadership challenge to Starmer as early as next week, once he is officially sworn in as a Member of Parliament. He will need the backing of at least 81 Labour lawmakers.
A key figure on the party’s left often referred to as Labour’s “King in the North,” Burnham stated in his victory speech that Makerfield was “not a stepping stone” but a “touchstone,” pledging to prioritize neglected communities in his political agenda.
In his victory acceptance speech, Burnham seemed to be laying the foundation for a leadership bid.
He remarked that the victory offers the “opportunity to build a new politics, based on unity and hope”, and a chance to steer “away from the path that leads us to a divided, dark politics similar to what we see in the United States,” emphasizing that “we must steer the country back on the right path.”
U.K. fiscal discipline in the spotlight
While Burnham’s triumph was largely anticipated, it raises several immediate questions for the markets, according to Kallum Pickering, chief economist at Peel Hunt.
Of utmost concern is whether a Burnham administration would adhere to Labour’s current fiscal rules and if his policy agenda poses a risk of exacerbating inflation pressures.
This comes as official data reveals an unexpected increase in U.K. public borrowing. The Office for Budget Responsibility disclosed on Friday that the U.K.’s budget deficit stood at £23.3 billion ($30.8 billion) in May, the highest level for that month in six years and significantly above the £18.9 billion forecasted by economists.
Burnham, last month, took steps to assuage investors, retracting previous remarks where he implied that the U.K. was “in hock to the bond markets.”
Pickering mentioned that he does not anticipate Burnham signaling a departure from the current framework on borrowing and debt — but he cautioned that investors might still demand additional compensation for inflation risk in U.K. government bonds.
“I anticipate seeing some inflation premium,” Pickering stated on CNBC’s “Europe Early Edition” on Friday, highlighting potential pressure across both short- and long-dated government bonds, known as Gilts.
The yield on 10-year Gilts, the benchmark for U.K. government borrowing, surged more than 6 basis points in early trade on Friday to 4.8162%. Yields on 2-year and 30-year Gilts also saw an uptick.
Matthew Ryan, head of market strategy at Ebury, remarked that markets are underestimating the risk of Burnham challenging the U.K.’s fiscal rules on government spending, income tax rates, and borrowing.
“There’s very little fiscal headroom, there’s very little wiggle room for the government at the moment,” he stated on CNBC’s “Squawk Box Europe”, noting that the Autumn Budget will be the next major test for the Labour government. “We do anticipate some downward pressure on U.K. assets.”
U.K. government bond yields trade at a premium to developed market peers. This partially reflects political instability in recent years.
Pickering added: “It’s right that the market will pay attention to the relationship between bond yields and sterling. We’ve had this unfortunately all-too-familiar situation in the U.K. where bad policies push up interest rates and push down sterling. That’s the thing to watch.”
The timeline of any leadership challenge could also prove critical.
An orderly transition could limit market disruption if senior Labour figures conclude Starmer no longer commands support. But Pickering said a drawn-out contest between Starmer and Burnham may leave investors waiting for greater clarity on tax, spending, and borrowing measures.
According to Pickering, a bigger question revolves around who would serve as finance minister in a Burnham cabinet and how that would ultimately shape economic policy.
“The uncertainty for me is not over what happens next in Number 10, it’s what happens next door in Number 11,” Pickering said, referring to the traditional residence of Britain’s chancellor of the exchequer.
