Burnham Is Facing The Same Dilemma That Has Trapped British Politics Over The Past Decade

By Stefan Koopman, senior macro strategist at Rabobank

To Govern Is To Choose 

Today, Andy Burnham will formally be confirmed as Labour leader. Barring any last-minute surprises, he will become prime minister on Monday. The UK will then have had seven prime ministers in a decade, with five taking office without a general election: May in 2016, Johnson in 2019, Truss and Sunak in 2022, and now Burnham in 2026. 

We have often used these mid-term transfers to make the point that Brexit is like a monster devouring its babies. While we do think that this analogy is becoming increasingly stretched ten years after the vote, Brexit remains an important part of the UK’s story. It has contributed to weak productivity growth, subdued gains in real incomes and stagnant living standards, despite the explicit promise of sunlit uplands. The result is even more disappointment than before, and a never-ending search for a messiah who promises to restore rising prosperity. 

The macroeconomic backdrop helps explain why this search keeps ending in disappointment. The UK’s problem increasingly appears to be one of supply rather than demand. In our forecasts for 2024-29, consumption growth never exceeds a paltry 1.2% per year, while per capita spending is broadly flat. Yet inflation remains above target in five of those six years. Weak demand alongside persistent inflation points at persistent supply-side constraints. 

This leaves Burnham facing a dilemma that has trapped much of British politics over the past decade. He inherits high public debt, elevated borrowing costs and weak growth, while demands on the state continue to rise from defence, net-zero and an ageing population. At the same time, investors are increasingly reluctant to finance ever-higher levels of current spending, fearing persistent inflation. That limits the scope for the traditional political response of boosting demand to generate a short-term feel-good factor. If Burnham wants to change the UK’s economic trajectory in the run-up to the 2029 election, he will have to focus on expanding supply sooner than later. 

The problem is that expanding supply requires investment long before it delivers results. The UK needs more electricity generation and grid capacity if it wants to electrify industry, housing and transport. It needs more housing, infrastructure and business investment, which means overcoming planning constraints and local opposition. It needs greater labour supply in an economy still characterized by high inactivity and politically toxic immigration. And it needs both public and private capital directed to physical production after years of underinvestment. None of these bottlenecks can be removed quickly. 

For now, markets appear reassured by the expected composition of Burnham’s government. The appointment investors feared most, Ed Miliband as Chancellor, appears to have been avoided. Shabana Mahmood is now reported to be the frontrunner for the Treasury. She is widely viewed as closer to Rachel Reeves in her approach to fiscal policy than Miliband is. 

At the same time, she has signalled support for a more active state where investment generates clear economic returns. That matters. If the UK’s binding constraint is supply, then it will have to increase public investment. Expanding energy capacity, building housing, upgrading infrastructure and crowding in private capital all require the state to play a role. But higher investment spending cannot easily be layered on top of existing commitments in an environment of limited fiscal space. To create room for supply-enhancing investment, other areas of spending may ultimately face greater scrutiny. 

Markets welcomed this week the absence of a sharp turn to the left, but that alone does not solve the underlying growth problem. A supply-side agenda requires money, political capital, and time. Money remains scarce, with gilt yields near 5%. Political capital depreciates quickly. And recent British prime ministers have rarely been granted much time. If Burnham wants even a remote chance of changing the economic narrative before the 2029 election, he will have to make difficult decisions sooner rather than later. This may also mean testing his popularity with markets once the honeymoon period is over. To govern is to choose.