UK politics: Continuity priced in, risks simmer Political shift meets cautious market optimism

Markets have shown little reaction to the end of Keir Starmer’s premiership, with policy continuity largely priced in. However, internal Labour Party dynamics suggest a less attractive policy mix ahead, raising the prospect of a political risk premium in bond markets.

Andrew Burnham, the former mayor of Manchester and now an MP for one of its suburbs, looks set to become the UK’s next Prime Minister—most likely in July. However, there remains considerable uncertainty around his policy agenda, as confirmed by our conversations within Labour circles.

A lack of policy strategy is fine while preparing for an election, but it is consequential on the eve of a transition of power. In effect, the most probable outcome would be policy drift rather than a policy reset.

Economics versus politics

Burnham is due to inherit a challenging situation. The UK still faces structural issues—high debt, fiscal deficit, slow growth, unfunded defence commitments, among others. Compared to his predecessor, Starmer, two years ago, Burnham also has less time before the next general election and a weaker mandate.

Will he call for fresh elections? The vote on the right has split, while the Greens on the left have yet to consolidate their gains. Under Britain’s first-past-the-post system, Burnham may be tempted to throw the dice and seek a fresh mandate and more time.

However, that would be a high-risk gamble. Moreover, his popularity has already slipped significantly (Figure 1). This makes it unlikely, but that said, this scenario is hard to dismiss altogether. It would be market negative, given a baseline expectation of a less-centrist—and therefore less fiscally conservative—outcome.

Market view

The market’s view is that Burnham represents continuity—essentially Starmer with better charisma (Figure 2). The key question, however, is fiscal policy. Given limited fiscal space, how would a Burnham government seek to create room—through spending cuts, higher taxes, or increased borrowing? And what happens to the fiscal rules?

On most of these questions, the answer points to continuity. The fiscal rules are likely to remain in place, with Burnham already having stepped back from earlier suggestions of change. He is more likely to work within existing definitions, particularly around what qualifies as investment spending (for instance, reclassifying defence spending as investment).

At the same time, the need to sustain political support is likely to constrain any meaningful spending cuts or a departure from Labour’s manifesto commitments on income tax, national insurance, and VAT.

In effect, this points to a continuation of the current approach—targeted tax increases in selective areas, echoing a Rachel Reeves-style framework. The most prominent of these would likely be higher capital gains taxes, which could weigh on growth given the UK’s relatively low savings rate.

So, what actually is new?

A more interesting question is where the risks lie beneath that surface continuity.

• Personality: Andy Burnham may be more personable than Starmer, but the distinction is not merely of charisma. Differences in personality, management style, and broader character traits could materially shape decision-making and governance.
• Policy preference: Burnham sits to the left of Starmer. There is also a growing sense within Labour that Starmer has under-delivered on the Left agenda, alongside a belief—reinforced by the by-election results—that Burnham has effectively “defeated” Reform. As policy therefore drifts, it is likely to move leftwards, potentially undermining business confidence and weighing on growth at the margin.
• International relations: Starmer has built a credible international track record, particularly with the US. Burnham remains an unknown in this context, introducing downside risks in relations with the US, Europe and elsewhere, which could also prove growth negative.
• Policy execution: Running Whitehall is fundamentally different from running a city, and the learning curve is likely to be steep. Yet time is what Burnham lacks. His limited national-level experience, combined with a history of disloyalty among Labour MPs, raises concerns about his ability to deliver even existing policy priorities.

Taken together, these factors point to a potentially less attractive policy mix from a market perspective.

Bottom line

Policy risks are skewed to the downside, even if the headline expectation is one of continuity. The best-case scenario is the preservation of fiscal stability in the context of a low-growth environment. Downside risks, however, include fiscal stress, capital flight, and deeper economic stagnation.

While broader macro dynamics remain supportive of a gradual decline in UK rates—driven by lower oil prices and easing stagflation concerns—we nonetheless expect the UK-specific political risk premium to widen (Figure 3).