New Chancellor John Healey addresses HMT staff. Treasury. Picture by Kirsty O'Connor / Treasury.
New Prime Minister Andy Burnham has been busy, announcing three giveaways within the space of three days: a cut to electricity prices, a cap on bus fares and a cut to business rates for pubs and other entertainment venues.
The fiscal giveaways come in the context of a market that is nervous that the new administration will boost spending and inflation while borrowing more.
So a quick check-in with the markets and economists is required to take stock. The verdict? These giveaways aren't large enough to shift the dial and look to be more of a political messaging strategy that uplifts the narrative for the Labour Party after the downbeat Starmer years.
On the matter of cuts to electricity price cuts: "PM Burnham’s decision to cut VAT from electricity bills as of October will have a limited effect relative to the rise in bills caused by higher wholesale energy prices," says George Buckley, an economist at Nomura.
On the business rates relief, economists at Barclays say: "The government has announced a 20% reduction in business rate bills for some pubs, clubs and music venues. We believe it will have no discernible impact on inflation or the fiscal outlook."
The market concurs; what's been done thus far is too small to move the dial:
Above: UK ten-year yields minus U.S. ten-year yields suggest nothing remarkable has occurred lately in terms of UK fiscal premium.
We judge nervousness over the UK's fiscal position via the difference in UK borrowing costs (bond yields) versus Germany and/or the U.S. When the difference rises, that's a sign the market is asking for a greater premium from the UK than from the comparable nations.
What we've seen this week is that the changes in the spread between British, German and U.S. yields have proven relatively muted. The spread is historically elevated from previous missteps, but nothing noticeable has occurred lately.
What appears to be happening is that Burnham is building a positive narrative in the opening days of his tenure by generating friendly headlines.
These aren't meaningful giveaways, but politically, they probably do the job of bolstering his reputation.
Smoke and mirrors.
