ROI-UK budget risks leaving investors in the dark: Mike Peacock

UK ​Prime Minister Andy Burnham continues to enjoy the spotlight, but his government risks leaving investors in the dark by putting forward ​a “do no harm” budget. By deferring major public spending decisions until next year, Britain’s new leader ‌could ​end up repeating the mistakes of his predecessor. Burnham has flagged bold policy plans from 2030 onwards, including tackling the UK’s costly state pension, reforming welfare and weighing the case for rejoining the European Union. But he has offered few plans for the next three years and, as yet, has put forward no comprehensive growth strategy.

If media reports are correct and a multi-year spending review will not land until late next year, ‌the government will give investors only pieces of the fiscal jigsaw puzzle at its annual budget on Wednesday. They may struggle to determine how it all fits together. The UK does have some momentum. The International Monetary Fund's forecast this month puts UK growth at 1.3% this year, stronger than most expect.

Britain has also — unlike many countries in its neighbourhood — sought to reduce its debt. The IMF has praised these measures, urging the government not to let up. But Burnham and his finance minister John Healey have their work cut out for them: they must meet a fiscal rule requiring day-to-day ‌spending to be balanced with tax revenue within three years, while also not hampering growth in the lead-up to the next national election, due by 2029. Those plans have attracted more than a small measure of scepticism: governments do not tend to tighten spending just before voters ‌go to the polls. Yet signs that the government is backtracking could send bond yields soaring.

FISCAL FOG Walking this tightrope won’t be easy, and there is currently little sense of how Burnham and Healey intend to pull it off.

First, there is no clarity on how Britain will meet a defence spending target of 3% of gross domestic product by 2030. The Institute for Fiscal Studies think tank estimates that could require tax rises or welfare cuts of up to £35 billion ($46.8 billion). Healey resigned as defence secretary when Burnham's predecessor, Keir Starmer, tried to dilute that goal. But now he may still struggle to meet it himself, and he must first find almost £5 billion for existing defence spending commitments.

On top ⁠of this, Healey ​also needs to find revenue to fund the Labour government's promises to ⁠ease soaring energy costs driven by the US-Iran war. The finance minister is expected to do so by taxing banks more, but that does not sit easily with the government’s ambition to galvanise the economy. Lenders may try to pass the cost on to borrowers via higher loan rates and lower savings rates — not exactly a recipe for ⁠economic dynamism. With the UK tax burden already at historic highs, the policy mix would seemingly require the type of spending cuts that Labour parliamentarians rejected when Starmer previously proposed them. But if the nettle is not grasped soon, the prospect of doing so before the next election will grow dimmer, and bond markets will keep tightening ​the screws.

The danger of being overly cautious and backtracking on plans is something Starmer learned only too well. VANISHING HEADROOM

Healey has repeatedly sworn allegiance to fiscal discipline, which has assured investors, but he needs to show, not tell. While his predecessor, Rachel Reeves, ⁠helped him last year by increasing the government's margin for error in meeting its fiscal rules to around £24 billion, this year’s selloff in government bonds, higher inflation and new spending commitments may have halved that headroom. Healey may try to argue, fairly reasonably, that the buffer is there to be run down during tricky times, giving the government the ability to borrow ⁠a ​bit more than previously planned. However, the scope for increasing debt further is slim. Following the last budget, the Office for Budget Responsibility (OBR) calculated that Britain would pay £110 billion in debt-interest payments in 2025/26 – nearly double the existing defence budget.

Opposition Conservative Party leader Kemi Badenoch accuses the Labour government of kicking hard choices into the long grass. “I can see what they’re doing, the country can see what they are doing,” she said. “It is time to take the difficult decisions and put the country first.” She may have a point. Burnham has denied that an early election is ⁠in play, but putting off tough decisions on public spending and deferring big policy plans until 2030 smacks of a prime minister thinking of seeking a fresh mandate from the electorate. That is Badenoch’s firm prediction.

If not, then perhaps the government is sitting tight, ⁠hoping for a US-Iran deal, which could help cut energy prices, which, in turn, ⁠would likely help boost UK growth and government coffers. “Hope” may be one of Burnham’s favourite words, but it is not a currency bond markets trade in.

(The views expressed here are those of Mike Peacock, the former head of communications at the Bank of England and a former senior editor at Reuters.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on LinkedIn, and ‌X.

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(Writing by Mike Peacock Editing by Marguerita Choy and Anna Szymanski)