Bond markets give Burnham a painful reality check.
The new PM and his Chancellor must avoid triggering a sell-off in their first Budget
Tim WallaceDeputy Economics EditorShow biography
Published 01 September 2026 2:47pm BST
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Even before this latest surge in global borrowing costs, Andy Burnham faced an increase in the Government’s debt interest bill Credit: Cathal McNaughton/Reuters
As Andy Burnham walked into the House of Commons for the first time since he became Prime Minister on Tuesday, a storm was under way in the bond market.
Concerns that wars in Iran and Ukraine, drought and heatwaves will trigger a fresh spike in inflation sent government borrowing costs globally surging to multi-decade highs. In the UK, long-term borrowing costs hit their highest level in 28 years.
It is a problem for the Prime Minister and John Healey, his Chancellor, as they begin planning their first Budget, to be delivered next month.
For all Burnham’s cheery talk of ditching the dour approach of Sir Keir Starmer and governing with a fresh “sense of optimism”, the former Manchester mayor’s options are severely constrained by the cold, hard reality of the nation’s dire finances.
Much as he wants to boost spending on everything from council housing to defence to social care, the near-£3tn national debt bequeathed to him puts tight limits on any new borrowing plans.
And the financiers who lend to Britain in global markets are alert for any hint of profligacy, amid growing fears of excessive debt around the world. It presents serious economic and political risks for the Prime Minister.
Just as Liz Truss hopelessly misread the mood in financial markets – cutting taxes and ramping up spending at the very time interest rates were rising – so Burnham risks launching a fresh round of borrowing at the worst possible moment. We all know how costly Truss’s misstep turned out to be.
Borrowing costs are already considerably higher today than they were at the height of the Truss panic. Britain pays more than 5.2pc on its benchmark 10-year debt. That compares to a brief peak of just more than 4.6pc in the autumn of 2022.
Our borrowing costs are also the highest in the G7 economies by a considerable margin. The next-highest is the nearly 4.8pc paid by the US, which is currently battling to avoid its own debt crisis.
Even before this latest surge in global borrowing costs, Burnham faced an increase in the Government’s debt interest bill.
Official projections from March – made just before the start of the war in Iran – showed that the annual cost of servicing the debt was on course to rise from more than £130bn this year to more than £160bn by the end of the decade.
Simon French, the chief economist at Panmure Liberum, estimates that higher bond yields in markets could add a further £6bn to the bill.
That is bigger than Sir Keir Starmer’s defence investment plan, which increased annual spending by no more than £4bn.
Before entering No 10, Burnham declared Britain must “get beyond this thing of being in hock to the bond markets”. But the scale of the Government’s debt makes this more easily said than done.
Sanjay Raja, an economist at Deutsche Bank, warned on Tuesday that Burnham risks triggering “a painful sell-off” in bond markets if he ignores the concerns of investors and opens the spending taps.
The Prime Minister has promised to keep Rachel Reeves’s fiscal rules, which she introduced in 2024. Under these guidelines, the Government must aim to pay for day-to-day spending – such as benefits and the wages of public sector workers – with tax receipts, not borrowing. It must also reduce debt as a share of GDP in three years’ time.
These allowed her to borrow more than was allowed under the Conservatives’ framework, including by adopting a new definition of debt, which offsets more public assets against borrowing.
Burnham said he will not ditch the rules, but he will seek to use “flexibility” within them. This is expected to mean more borrowing.
Reeves had been on track to hit the target of paying for day-to-day spending through tax receipts alone with some £20bn to spare. Some of that headroom has been eaten away by higher interest costs, but Burnham could still choose to borrow more if he is happy to risk meeting the target by a smaller margin.
He could also ramp up borrowing for investment, particularly if he can find ways to generate financial assets, which are offset against debt under the new metric adopted by Reeves.
Unfortunately for him, as far as financial markets are concerned, debt is still debt, no matter how the Government tries to dress it up.
Raja says investors will be watching Burnham’s first Budget closely.
“Market reaction will vastly differ depending on the type of Budget Burnham delivers,” he said. “There’s a lot hinging on this from a market standpoint. Getting the bond maths wrong at this juncture could risk a painful sell-off.”
The exact extent of the market reaction will depend upon the scale of borrowing unleashed at the October Budget.
“At its heaviest, the upcoming budget could deliver in excess of £50bn in gross additional spending measures. At its lightest, a benign Budget could amount to £10bn to £20bn in more spending,” he said.
So far, it appears Burnham is backing down in his tussle with the bond market: spending promises are shrinking in the face of financial reality.
But this too is not without risk for the new Prime Minister. For a man who campaigned on a promise to govern differently, tempering his ambition could leave him open to a charge of hypocrisy.
Yet that may be the lesser of two evils. Investors’ judgment on the Government’s plans – and their willingness to finance new borrowing – can be tracked minute by minute on traders’ screens.
Even a year ago, when Burnham seemed far from No 10, his now-notorious “in hock” line caused tremors in bond markets.
Now that he heads the Government, every word can trigger earthquakes.
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