Inflation data highlights fiscal challenge for Burnham ahead of first Budget

The latest inflation figures have underscored that the state of the economy remains the most significant challenge facing Prime Minister Andy Burnham. With only 42 days remaining until John Healey delivers his first Budget, concern is growing at all levels of the government and the Labour Party regarding the capacity of that fiscal statement to substantiate the Prime Minister’s rhetoric. Burnham has promised the biggest change in British politics in four decades, yet there is increasing apprehension that the Budget may prove unable to deliver on such ambitious claims. The tension between political aspiration and economic reality is becoming a central focus for the administration as it prepares for its first major test of credibility.

The difficult economic environment is driven by a combination of global and domestic factors. Internationally, the persistence and worsening of conflicts in the Middle East and Ukraine continue to exert pressure on markets. Additionally, the artificial intelligence boom is pushing up borrowing costs, a trend affecting many nations. However, distinct domestic issues specific to Britain are also at play. This was highlighted by former Bank of England chief economist Andy Haldane, who told LBC on Tuesday that without visible signs of cuts to public spending, markets suspect the government is a traditional tax and spend socialist administration with better social media presence. Haldane has at times informally advised Burnham’s operation, lending extra weight to his criticism. A similar sentiment was recently voiced by prominent economist Lord O’Neill, another sometime adviser to the Prime Minister.

In response to Haldane’s comments, Burnham stated that the criticism did not tell the full story and insisted that the government was not operating as described. He cited the decision to put digital ID on hold as an example of taking difficult decisions to reprioritise government spending. Burnham vowed to continue making such choices to ensure the economy remains on track. However, the choice of digital ID as an example is notable. The scheme was abandoned in the days before Burnham became Prime Minister to focus on cost of living policies. The associated spending was subsequently re-allocated within the new government’s first few days to cut VAT on household electricity bills. Critics, including former cabinet minister Darren Jones, argued at the time that this was not a reduction in public spending but merely a reprioritisation, noting that the government had not yet allocated the money for the digital ID scheme in the first place.

Signs from Healey’s first major speech as Chancellor last week indicated a desire to reassure markets. He promised to control public spending and praised his predecessor, Rachel Reeves, for beginning to recover Britain’s fiscal discipline. While it is not unusual for a Prime Minister and Chancellor to adopt different tones or emphasise different priorities in public appearances, questions are emerging within the government about the alignment of their economic visions. Healey, who served as a junior minister at the Treasury almost 25 years ago, has long been engaged with questions of boosting growth across the country, a theme that is now central to Burnham’s vision. One government source acknowledged that there are those beginning to wonder whether their economic visions are as aligned as expected, with some vocalising these concerns.

There is also fear among some in the government regarding the adverse political consequences of a Labour administration seeking to demonstrate fiscal credibility. The removal of the Winter Fuel Allowance for most pensioners was one of Sir Keir Starmer’s first acts and is arguably an early factor in his political demise. For Labour’s political opponents, the current situation raises the question of whether the Prime Minister is willing to disappoint his own MPs. However, the frustration in parliament regarding winter fuel was primarily caused by the furious reaction of Labour MPs’ constituents. This presents a more fundamental tension: whether the policies needed to soothe markets are politically deliverable given Labour’s electoral coalition and its need to shore up the progressive vote. The Budget, arriving in six weeks, will be the first and most important sign of the new government’s answer to this question.