Andy Burnham has been warned that an ill-judged commitment in his first Labour conference speech as prime minister could unsettle Britain’s bond market and push up borrowing costs for households, businesses and investors.
Nigel Green, chief executive of deVere Group, said investors would be watching Burnham’s address closely as the 10-year gilt yield remains close to 5.29 per cent, its highest level since the global financial crisis.
With Chancellor John Healey’s first Budget due on October 28, Green said markets would be looking for evidence that the government’s spending ambitions can be reconciled with its fiscal rules.
“Gilt investors are listening to this speech with a calculator in hand. Andy Burnham’s selling ‘hope again’, and the bond market wants to know who’s paying for it,” Green said.
“Britain’s already had one lesson in how fast confidence can vanish. On his first day in office, a single remark about using ‘flexibility’ within the fiscal rules sent 10-year yields up eight basis points and pushed 30-year borrowing costs to 5.75%.
“UK debt underperformed both US and eurozone bonds.
“Markets have long memories.”
Healey sought to reassure investors in his conference speech on Monday, stressing that he and Burnham were united in meeting the government’s fiscal rules. Gilt markets showed little immediate reaction.
Green said: “Markets heard the right words from the Chancellor and shrugged. Promises are cheap when yields are this high. Investors want figures, and the figure that matters most is headroom.”
He said Healey was estimated to have lost roughly half of the £23.6bn fiscal buffer inherited by the government, leaving ministers with a narrower margin ahead of the Budget.
“Rebuild it convincingly in October and gilts have room to rally. Let it shrink further and the UK risks a punishing repricing,” he said.
Social care is expected to feature prominently in Burnham’s speech, with proposals for a national care service carrying an estimated annual cost of £18bn. The prime minister is also expected to argue that the state pension triple lock cannot continue indefinitely in its current form.
The Office for Budget Responsibility has projected that state pension spending could increase by more than £15bn a year by 2030 if existing arrangements remain unchanged.
Green said the proposed social care reforms could prove economically significant but warned that investors would focus on how they are funded.
“Social care reform is long overdue, and the ambition deserves credit. But an £18bn annual commitment without a clear funding source would be read as borrowing by another name,” he said.
“Opening a debate on the triple lock shows real political courage. Investors will ask whether the savings arrive fast enough to count, because a reform that pays off in a decade does little for a Budget next month.”
Burnham is also expected to promote a publicly owned “Great British Grid” alongside wider proposals for greater public control of energy, water and housing.
Green said the plans could create investment opportunities but also raise questions over their cost and treatment of existing investors.
“The Great British Grid could prove transformative, or it could prove ruinously expensive. For anyone holding UK utility shares or bonds, the questions are brutally simple. What will it cost, who gets compensated and on what terms?” he said.
“Vagueness here is dangerous. Capital flees uncertainty far faster than it ever comes back.”
The government is facing an increasingly challenging international backdrop, with US Treasury yields also elevated and higher energy prices threatening to add to inflationary pressures.
“Britain doesn’t control the global forces lifting yields, but it does control its own credibility,” Green said.
“With Treasuries at a 19-year high and oil surging, the UK has zero margin for self-inflicted damage.
“Every basis point on gilts flows into swap rates, then into mortgage offers, then into household budgets. Lenders have already lifted fixed rates by as much as 0.35 points.”
Green concluded: “‘Hope Again’ makes a fine conference slogan, but in the bond market, credibility is the only currency that counts.
“Burnham can deliver both, but he has to prove the numbers add up before October, because the gilt market won’t wait for the Budget to deliver its verdict.”
For investors, the conference speech is therefore less about rhetoric than whether the government can demonstrate that its spending plans are backed by credible funding and compatible with its fiscal constraints.
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