Top of Mind - UK Politics – PM Starmer resigns, what comes next?
UK Prime Minister Starmer has resigned. The decision did not come as a surprise following his rival Andy Burnham’s landslide victory at last Thursday’s by-election. As we said in our Top of Mind webinar, Burnham will almost certainly go on to become the UK’s next prime minister. Indeed, one of his closest rivals Wes Streeting also came out this morning to endorse Andy Burnham, and it is possible that Burnham may become PM unopposed. Other possible challengers such as Angela Rayner and Ed Miliband have yet to explicitly state their stance.
Timeline from here – The nominations for the leadership open on 9 July, and – if there is a contest – the PM should be confirmed by September. In a scenario where there is no other leadership contender to Burnham, he could already become PM by late July. If there is a contest, this would take place over the course of late July and August, with a vote among Labour party members to take place on 1 September.
What would a PM Burnham mean for the UK economy and markets? Andy Burnham leans to the left of Keir Starmer, and he is likely to take measures to ease cost of living pressures on low income households, but we expect any such moves to be funded by tax rises on the wealthy. Burnham is also in favour of nationalisation of the ‘essentials’, with an immediate step likely to the takeover of troubled utility Thames Water. He is also in favour of electoral reform, specifically to replace the UK’s first past the post voting system with proportional representation. This would fit the UK’s increasingly fragmented political landscape, though it is likely to be a longer term goal rather than an immediate change.
Burnham’s policies could well be modestly growth supportive from a cyclical perspective, assuming he does indeed implement more redistributive policies. Most importantly from a financial markets point of view, we expect Burnham to broadly stick to the current fiscal rules; put another way, we view the likelihood of a ‘Liz Truss’-style testing of bond markets to be very low. Indeed, our base case sees the UK staying on a fiscal consolidation trajectory, with the budget deficit a expected to fall from 5.2% in 2025 to c3.5% in 2026/27. As such, while we could see some short-term volatility in Gilts, we expect the long-term outlook to remain positive. This view seems so far to be shared by the wider market, with UK 10y Gilt yields falling by as much as 5.2bps from today's highs.
For more on our views on the impact of a Burnham government on the UK economy, monetary policy, bond and FX markets, please see the replay of last Friday’s Top of Mind webinar. (Bill Diviney & Larissa de Barros Fritz)