Andy Burnham and the enormous smallness of the British state

Few can doubt this man can do politics. He has executed a bloodless coup d’État against a British Prime Minister with a majority of 174, a man who had not committed any heinous sin or made a major policy error but was just deemed not quite good enough.

In the days before his ascension, Andy Burnham presented an award to the indie band James. He did it really well, looking like a real music fan, not a lame politician transplanted painfully into the cool world of music.

As he walked off the stage, lead singer Tim Booth turned and, with familial fondness and a kind Manc lilt, quipped: ‘Andy Burnham, what have you gone and got yourself into now?’ The moment spoke to Burnham’s undeniable ability to behave like a world-class political operative whilst preserving his carefully crafted  ‘our Andy’ persona, but also to the underlying sense that this man may not quite realise what he has done.

His first days in office have shown all those political skills but also just how impossible is the straightjacket is that he put on when he assumed the British premiership.

As he debated his early policy decisions, the yield on British government debt wobbled like the ECG on a sick patient. His hopes of raising the personal allowance soon disappeared under the guidance of Treasury officials, who no doubt informed him that he could not do it without raising the additional rate of income tax, ruled out by the Labour manifesto he has promised to adhere to. If the bond markets control the tightest strap around his chest, it is the Labour manifesto which tightens the one around his neck.

He is in control of an enormous state. Over the past ten years the share of British GDP has risen from 40% to 45%, and peaked much higher during the pandemic. During much of this time the state also felt big. It was able to do big things like underwrite jobs during the pandemic and re-write its trading relationships. Yet the state Burnham inherits in 2026 also feels very small. His early promises to reduce electricity bills by £45 a year (except not really, as it’s a six-month policy and that is an annualised number) and cap bus fares at £2 may signal intent but, by the standards of Labour history, amount to tiny interventions in the lives of struggling people. He cannot do more. The bond market will not allow him to borrow, the Labour manifesto will not allow him to spend.

The key question for investors is whether Burnham will suffer along in this straightjacket for the last three years of this parliament or whether he will attempt to stage a breakout. How could he free himself from these rules?

He may attempt the boldest move possible and hold an early election. History teaches that prime ministers taking control mid-term hit their peak of popularity around three months after taking office. So if he is going to go, he may have to go soon. But for this election to free him fiscally, it would likely have to be one that proposed a rise in one of the basic rates of tax. That would be, as the old civil service joke goes, ‘very brave, Prime Minister’.

Or could he try something subtler, avoiding toying with the promises made in the manifesto and instead attempt to goad the bond markets into a new fiscal settlement. His talk of a ‘ten-year plan’ for Britain could translate into moving the fiscal rules onto a ten rather than five-year footing.

If the bond markets were willing to accept this, then this would surely be a sensible move, allowing longer-run planning, investment in capital projects, and the rebuilding of defence infrastructure.

Yet it is not at all certain the bond market will accept it. British government borrowing costs are the highest in the G7. The IMF has issued sharp warnings in recent months and highlighted the fact that gilts are increasingly owned by opportunistic hedge funds rather than long-term pension schemes, which increases the likelihood of instability.  Indeed, even floating this idea subtly could be explosive. Were it to come accidentally out of Burnham’s mouth alongside his casual promise to increase defence spending, reform social care, build many new council houses, and reduce energy bills, it could well have an explosive effect. Truly delicate handling would be required.

Perhaps his escape comes in the form of other tax measures? He does have things he could try. Almost every new Labour chancellor proposes equalising capital gains with income tax. This, unfortunately, tends to collapse as an idea as soon as Treasury modelling demonstrates it will cost more than it raises. Perhaps, Burnham concludes this is an establishment stitch-up and presses on anyway? Certainly the alternative ‘wealth tax’ seems unlikely, given it would take several years to implement and so is unlikely to provide much short-term relief.

In their wilder moments some Labour special advisers may imagine that announcing longer-run revenues from a wealth tax alongside new 10-year fiscal rules could create fiscal balance. The bond markets are, in our view, unlikely to tolerate such a novel approach.

There is nonetheless much Burnham can do to spur growth. Rebuilding trading relations with the European Union and choosing to spend political capital by agreeing to pay into the EU pot could provide a real increase in growth on a five-year view. Likewise, a serious attempt to reform the welfare system to reduce the burgeoning bill by incentivising work, despite the objections of backbenchers, would signal a focus on productivity growth.

There is, of course, one final hope Burnham may have. Perhaps he is simply a lucky general. As he swept into office, UK inflation numbers came in lower than expected at 2.7% providing renewed hope of lower interest rates for consumers, lower borrowing costs for the government, and an easing of energy bills.

He also comes to office just as arguably his most potent political rival, Nigel Farage, faces the very real prospect of a parliamentary investigation (after his own self-imposed by-election) which has the potential, at least, to humiliate him. Perhaps a combination of a humbled Reform party, a new Prime Minister, and some economic easing is enough to buy him the time for reform. Perhaps, just perhaps.

As investors, our response is to wait. We consider owning UK government debt currently should only be done in a very limited form. The yields on offer from what we consider safer government bonds from the United States are comparable, with lower volatility levels and less event-risk. Likewise, the UK stock market may be cheap, but the environment remains challenging enough for us to prefer other allocations.

Despite this caution, perhaps, as the UK basks in the hottest summer for years, we can at least allow ourselves to hope that the currents of global economics will turn a little in our favour, our leaders will act with a little more decision and bravery, and things may improve for the UK.

Source: Office for National Statistics (ONS), Office for Budget Responsibility (OBR), and International Monetary Fund (IMF), as at July 2026.