TL; DR: Burnham has boosted political credibility upfront through cost-of-living relief, and postponed the hardest fiscal choices to the Autumn Budget and next year’s Spending Review. All while stressing that his government will adhere and respect the current fiscal rules. The Autumn Budget is coming soon, making time very scarce to deliver any of the maximalist plans that he has planned.
The first Budget is less likely to be about an outright break with the rules than about testing how much room can be found through spending reprioritisation, potential tax hikes, PSNFL flexibilities and delayed spending choices. That should make the first phase manageable for markets, assuming a decent headroom is left. What is decent? Probably something closer to £15bn. That said, Burnham’s strategic agenda argues against treating the early reassurance as the end of the fiscal-risk story. We cannot rule out an early election in 2027 if the polls continue to work in Labour’s favour.
This would allow Burnham to choose his own manifesto and opens the door to a tweak in the fiscal rules. What this means for Gilts is that the medium-term risk of a drift towards looser investment rules and more expansive fiscal policy will remain, with the next event to watch following the Autumn budget being the 2027 Spending Review.
Below, we answer the following Qs:
- What does PM Burnham want to do? We go through the key axis of his agenda and their potential cost. These include cost-of-living policies and more maximalist plans like the biggest council housebuilding programme since the post-war period and public control of key industries.
- How much fiscal headroom is really available? How much room does the government actually have to increase spending and how does the future of the current fiscal rules look like?
- What can Burnham announce? Are more tax raises to come? More welfare cuts?
- How will this move markets? Market implications for gilts, GBP rates and sterling
What does Burnham want to do? What has he set out to do so far as PM?
Burnham wants to show that he is acting quickly on cost-of-living measures, while keeping a longer-term investment story open (i.e., 10-year investment plans). Key points:
1. Political pitch: a clean break from Starmer by being more active
Burnham already announced plans to scrap VAT on domestic electricity bills from 1st October on his first day in office (a contrast to the previous administration’s withdrawal of energy support). He also pledged to end rough sleeping. Both show a desire to break from Starmer’s more passive political pitch. That said, Burnham’s government has so far ruled out rent controls, pointing to a process on Thames Water (instead of full nationalisation), and maintaining the existing position on North Sea licensing. All suggest more continuity than rupture at this stage.
2. No. 10 North (in Manchester)
Make power flow to different regions and pursue equivalent living conditions across the country. This also means possibly more local retention of tax receipts and more flexible “single settlements” for mayoral areas. Especially touched could be transport, housing, skills and local economic development.
3. Cost-of-living policy
Measures already announced include:
- 20% business rates cut for pubs, social clubs and live music venues from April next year. Expected to cost ~£100mn/yr. This will be funded by reviewing tax reliefs for businesses that do not help local communities (e.g., vape shops).
- VAT reduction on electricity bills. Expected to cost £850mn in 2026/27. Government sources say that the VAT cut is funded for this financial year. The Government is planning to reallocate £1.8bn in planned savings over three years from scrapping the digital ID scheme but some former officials are arguing that the digital ID project was never formally funded.
- Confirmation of the return of the £2 bus fare cap (outside London). Expected to cost more than £400mn total cost for 2027. Funded by reprioritizing the Department for Energy Security and Net Zero's budget, changing international climate funding from grants to loans. Remaining funds are drawn from existing Department for Transport budgets.
Some other measures that could come include: raising the income tax personal allowance, extend the electricity VAT cut beyond Mar27, and/or potentially any sort of rent support measures. Could the 20% business rate reduction be expanded to small/high-street firms?
1. Public control, not full-scale nationalisation
More public control in key strategic areas like housing, water, energy, and transport). Public control will probably expand but wholesale nationalisation is unlikely (i.e., stronger state direction and local delivery). Fiscal constraints remain the key limitation here.
2. Housing and social care: Go Big or Go Home
Burnham wants to bring the biggest council housebuilding programme since the post-war period. It looks more like a focus on supply rather than a market-planning reform. Besides council housing, social care is one of Burnham’s biggest ambitions. He has already accelerated the review and a “National Care Service vision”. We think that any maximalist approach would likely need a tax rise that he would not be able to square with the 2024 mandate. Burnham is engaging in a cross-party process so that the process could withstand election cycles. The question is whether parties will agree on funding, which could perhaps limit any sort of reform before the next election. We had some rumours about stamp duty, council tax and property tax, but these are unlikely to come anytime soon. Government sources have said that suggestions of scrapping council tax or stamp duty being under active consideration by Burnham are not true.
3. Welfare and youth unemployment
Move away from an education system configured mainly around the university route to a clearer technical pathway for young people into a reindustrialised Britain. Youth unemployment is where there is consensus within the Labour party. The government had already committed funding from the Growth and Skills Levy for a new bursary and free training for eligible under-25s. Could there be more top-up funding to come?
The expenditure as it is: Water and energy nationalisation remain speculative at this stage, with no formal government commitment to the full-scale programmes often cited in external estimates. By contrast, the VAT cut on electricity bills, the business rates relief for pubs/social clubs and the reinstatement of the bus fare cap (roughly 1.3-1.5bn of identifiable costs in FY26/27) have all been announced and are currently presented as being funded through reprioritisation of existing spending or offsetting savings rather than additional borrowing.
The potentially much larger fiscal commitments around housing, social care and public ownership remain insufficiently specified to generate a reliable cost estimate, meaning the market is likely to focus on whether the Budget contains new spending commitments beyond those already announced.
How much fiscal headroom is really available?
FY25/26 ended with a £23.6bn headroom. We believe current headroom has decreased to something closer to £12bn. Two key drivers: the higher-than-expected fiscal borrowing YTD (£8bn shortfall) and the move in Gilt yields (up by ~90bp in the 10yr benchmark).
How much flexibility does the government actually have and how does the future of the current fiscal rules look like?
Since Burnham took office, he has been stressing his government’s commitment to the current fiscal rules. The problem we see is that his maximalist agenda pushes against them. The choice of Healey as new Chancellor took us all by surprise. It’s been a good choice to restore confidence in the market. He comes across as disciplined and not afraid to say no. The only problem with Healey is that he is a big defender of defence spending, something that could add another layer of pressure to the alreadyscrutinised fiscal arithmetic.
That’s why Burnham and his team have been talking about using all the possible “flexibilities” within the rules. There are several ways to use the flexibility:
- Make more use of investing instead of rising day-to-day spending commitments. This would likely deteriorate the investment rule (public debt, defined as PSNFL, must fall as a share of GDP over the forecast horizon), but allow the government to not harm the stability rule (the government's day-to-day public spending must be fully matched by tax revenues by the target year of 2029/30). If the investment plans are sensible and deliver future growth, this may better digested by markets.
- Rely on more optimistic assumptions. This is not something Burnham and Healey can directly control but perhaps the longer-term reforms could prompt the OBR to upgrade some of the forecasts, which would improve both the investment and stability fiscal rules.
- Push fiscal consolidation further out. This would be one of the more market-unfriendly ways to use flexibility as it relies on future spending cuts that may not happen at all (like what happened with Starmer’s U-turn last year).
- Use more of the available headroom. This would be the other market-unfriendly measure. Leaving a small headroom at a time when political uncertainty is so high and interest rates could rise further seems like opening the door to future market panic.
What can Burnham announce? What are they likely to deliver?
The cautious thing to do given the erosion of headroom and the uncertainty policymakers are facing due to the oil story is to deliver a good budget with decent headroom, so investors feel assured. Allowing for more headroom would be the best positive signal for markets (something closer to £15bn). This would avoid another spike in yields that would ultimately harm the government’s fiscal balances. Time has been limited to engineer big changes. We expect Burnham & Co. to make use of the flexibility in the investment rule and try to define defence and housing commitment as capital spending to be able to create that headroom. A Spending Review is expected to come in 2027. This will give the government more time to reprioritise spending and address larger plans. Burnham & Co. could opt to push some fiscal consolidation in FY27 onwards on the back of it, but making toomuch use of this “flexibility” could prove counterproductive if the market thinks it’s too ambitious and politically contentious.
All of these would see the new government respect the current fiscal rules. The question then turns to how Burnham will fund his maximalist policy agenda. While at the beginning of their mandate fear of market reaction could box Burnham and his Chancellor into adhering to current rules for the first Budget, if the new government wants to tackle their agenda, the sensible thing would be to hold early elections to secure a longer mandate and be able to write their own manifesto. Burnham’s team is likely to kill any early election speculation, but given his 10-year investment mandate, an election around next spring would make things easier if polls continue to favour a Labour government.
The risk for Burnham is to leave a small headroom (£10bn or less), drive a big deterioration in the investment rule, and pitch new unfunded plans.
Most likely taxes (to create this £5bn headroom):
- CGT reform (£1.5bn): CGT raised around £22bn in 2024/25, making it a relatively small tax base compared with income tax or NICs. While there has been recurring speculation around aligning CGT rates more closely with income tax, comments from Healey today have rejected calls for full equalisation. That leaves less room for a major revenueraising reform. Previous governments have instead increased receipts through a gradual narrowing of allowances and reliefs, suggesting much of the more politically straightforward revenue has already been extracted. As a result, any further reform is likely to be more contentious while generating relatively modest sums in the context of the broader fiscal challenge.
- NICs broadening (£2bn): NICs is by far the most powerful revenue lever here, with the 2024 employer NIC reforms bringing one of the largest tax-raising reforms in decades, with gross revenues estimated around £24bn. Politically this may be really unpopular though.
- Bank taxation (£0.5~1.0bn): In the eyes of the labour government, a bank surcharge may not be entirely unaligned with the political incentives. The bank surcharge was originally 8%, being cut down to 3% in Apr 2023. This was a move done strategically to prevent the tax burden on banks from skyrocketing when the UK Corporation Tax moved from 19% to 25%. There was also a threshold increase to protect “challenger banks”. Pre-2023 reform, the UK government received £2.6bn per annum in the bank surcharge and £10.9bn overall. In the latest financial year, the corporate surcharge was £1.2bn and the total was £12.3bn. It’s hard to see it being raised back to the 8% it was before, but a surcharge increase of 1-2% could help the fiscal room.
Quick word on another possibility – a bank windfall tax. This is not something we think will happen. London (and hence, the UK economy) is very dependent on the banking sector and this sort of measure could backfire quickly if Banks decide to decrease investment in the City and slow down lending to the real economy. The Italian experiment (Meloni introduced a bank windfall tax to quickly amend it) is a good example of how such a measure may backfire in the end. In August 2023, Meloni's government unexpectedly announced a 40% windfall tax on banks' excess profits, wiping roughly $10bn off Italian bank market capitalisationsin a single session and triggering a sharp sell-off across bank equities and credit. Within 24 hours, however, the government was forced to soften the proposal and subsequently watered it down further. The episode ultimately highlighted that while taxing banks can appear politically attractive, markets tend to focus on the broader implications for lending, investment and policy predictability, often forcing governments to backtrack once the economic consequences become apparent.
- Property tax changes (£1.0bn): Surcharges on second homes, overseas buyers, high-value properties, or targeted stamp-duty changes are politically easier than raising VAT or income-tax.
Could the UK cut welfare? Unlikely. The triple lock, which was the most likely reform, has been pushed back to 2030. Additionally, a move to change it now whilst labour polls narrowly ahead of its opposing parties is a political cost too high as opposed to the relative fiscal gains.
How consequential is this budget expected to be? A Quick Comparison to Reeves’ first Autumn Budget
A closer look to potential market reaction: A study on market movements post UK budgets
Historical precedents will likely help to serve as a guide of how markets can react to the Autumn Budget. Markets seem to skewedtowards punishing, rather than rewarding UK Gilts and FX for delivering a disappointing budget. While the current backdrop is one of higher yields overall, UKTs have overall traded more positively compared to EUR rates. If the budget comes in line with our base-case, we expect a modest duration sell-off partly due to the positivity that UK-Rates have been trading, with the 10Y settling around +5bps over a one-month (22-day) trading period. GBP will be muted, with moves to the 1.3175 level but the driver overall is still dollar-strengthening and the EUR Rates repatriation flows.
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