What might markets look for in Burnham’s choice of Chancellor?

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By David Lawrence (@dc_lawrence) and Dr Pedro Serôdio (@pdmsero)

Chancellors can make or break a government. Starmer and Reeves’s fiscal prudence has been defined by their keenness to avoid a bond market meltdown of the kind experienced by Liz Truss and Kwasi Kwarteng in 2022, which ended their short-lived administration.

In choosing his Chancellor, Andy Burnham will be keen to reassure markets. His new Chancellor will then need to keep gilt yields low (i.e. have lower borrowing costs, and spend less on debt repayment) to deliver on his priorities, especially if they involve an increase in spending, whether that’s for public control of utilities, infrastructure investment, or public services.

Who lives in No.11 arguably matters just as much as their next door neighbour, especially now. Growth is low, public finances are constrained, and bond yields are higher than they were after the infamous Truss mini-budget.

So, how can Burnham win market confidence to deliver on his goals? We spoke to several economists, bond traders and investors, to ask them how markets might respond to a Burnham premiership. Here are five things that he and his new Chancellor should bear in mind:

1. The Chancellor has two jobs. They need to be good at both.

The Treasury is a strange department for several reasons. One reason is that it has a dual mandate of balancing the Government’s Budget and creating economic growth. These are often complementary, and sometimes in conflict, and a credible Chancellor must be good at both.

Truss and Kwarteng mistakenly thought that they could get away with unfunded tax cuts and a huge energy bill liability, because they thought that these measures would deliver growth. Markets were swift to punish them. Kwarteng may or may not have been right that tax cuts would stimulate economic activity, but he had failed in the first duty of the Chancellor: balancing the books.

However, balancing the books is only half the job. While Reeves has avoided Truss-style market meltdown, UK gilt yields are higher than they were in 2022. The primary driver of this–higher interest rates resulting from the Iran war energy shock–is outside her control, but the effect is ultimately the same: the Treasury is severely constrained in its ability to borrow or spend more. While markets clearly trust Reeves to stick to her fiscal rules, the UK’s low growth means it is not in a position to borrow cheaply, and therefore has little to spare for investment.

Reeves has performed her first duty well, but growth is still lacking. To win market credibility, Burnham will need someone who can do both.

2. Markets can see through hollow commitments

In Opposition, Labour’s priority was to reassure voters and the business community that it had moved on from Corbynism, and now cared about economic growth.

To this end, it was mostly enough just to talk loudly about growth, without worrying too much about policy detail. When a Government deals with bond markets, however, the opposite is true: traders are paid a lot of money to read the small print, and they understand politicians well enough to treat bold claims with suspicion.

This means that a good Chancellor is one who says less and does more. Talking about killing bats and newts may make headlines, but it must be backed up by credible policy to achieve growth.

In Opposition, you need to make headlines to get voters’ attention. But a Chancellor doesn’t need to communicate with markets via the Sunday papers. A phone call, or even a footnote, will do, so long as it is backed up by credible policy. The other key channel is, of course, the Office for Budgetary Responsibility (OBR), discussed later.

That said, markets will treat policy commitments with a level of suspicion. In Opposition, one can get away with being hand-wavey about how policy reforms will deliver growth. In Government, billions of pounds worth of gilts in pensions ride on whether your policies work or not, and bond traders are paid a lot to make the right bet.

Markets are suspicious of theoretical claims, like “investment in skills will create long run growth”, “if we invest more now we can spend less later”, or “if we cap prices then inflation expectations will adjust” need to be backed up by evidence. Markets won’t bank growth impacts unless they are confident in the durability and real economic impact of a policy. For instance, Labour’s planning reforms got scored positively because they were backed up by detailed legislation.

3. Reform is hard, so pick your battles.

Everyone in Westminster knows that our tax system is a mess, the OBR’s power is disproportionate to its abilities, and the Office for National Statistics (ONS) is in dire need of reform. The Chancellor is nominally responsible for all of these, and previous would-be chancellors have set out ambitious plans for reform that came crashing down on contact with Treasury bureaucracy.

Since we are already over halfway through this Parliament, a new Chancellor must pick their battles.

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The OBR can feel like an annoyance but any attempts to remove or radically reshape it are likely to be received badly by bond markets. The OBR’s conservatism in scoring policies for growth is a blessing and a curse: while they make it harder for the Government to raise money for pro-growth investment, they also increase the overall level of bond markets’ faith in gilts, since it is clear that the Treasury is not marking its own homework.

That said, the OBR could undoubtedly do with more resourcing, including by building up its ability to capture the benefit of long-term reforms and investment in physical infrastructure, housing, and the benefits of agglomeration.

The OBR’s power is disproportionate to its size, which limits its ability to accurately score things like planning and regulatory reform, which require an in-depth knowledge of specific industries, legal constraints and behavioural changes.

Another area ripe for reform is debt issuance. Burnham is right that the Government is too “in hock” to the bond markets, insofar as short-term changes in interest rates can have a substantial impact on immediate spending. This is an undesirable state of affairs for both the Bank of England and the Government.

Solving it, however, will require the Debt Management Office to issue more long term debt relative to short term debt. Arguably, one of the Coalition Government’s greatest mistakes was failing to lock in debt at longer maturities when interest rates were at historic lows.

But when it comes to growth, the clearest candidate for reform is our tax system itself: our income tax actively penalises work through cliff edges and high marginal rates, for both carers and working parents. Stamp duty is a regressive tax on housing market efficiency, which should be replaced with a proportional property tax. Business rates could be structured to empower local authorities to invest in growth and benefit from it.

The new chancellor has three Budgets before the next election to fix as many of these as possible!

4. The levers for growth often lie outside the Treasury

The Treasury is nominally in charge of economic growth, but many of the most powerful levers for growth actually sit in other departments.

In our annual growth survey of economists and policy researchers, respondents rated planning reform, environmental regulations and energy as some of the highest priority areas for growth. All of these sit outside the Treasury, in places like the Ministry of Housing, Communities and Local Government (MHCLG), the Department for Energy Security and Net Zero (DESNZ), and the Department for Environment, Food and Rural Affairs (DEFRA).

(Results from our UK Growth Survey, 2025)

However, since the Treasury is ultimately responsible for growth, it is on the Chancellor (and her advisers) to build relationships with these departments and direct them towards growth.

As ever, this requires a mix of carrot and stick. Ultimately, the Treasury decides these departmental budgets. If we want MHCLG to prioritise planning reform, this means better resourcing its planning reform efforts and directing its efforts to do so. A few million more spent on staff should reap billions in GDP, if properly directed.

5. Not everything requires a fight

Lastly, and contrary to the instincts of many politicians, Burnham is a coalition-builder and should look for a Chancellor who can do likewise and find win-wins. Many of the best policies for growth do not require going to war with the public, or even one’s own party.

For instance, it is possible to substantially densify urban areas, by allowing upward extensions, accessory dwelling units, and better use of former industrial land, without having fights with environmental groups or locals in more rural areas. This happens to be the best route for growth too, as the highest-value housing is in existing urban centres.

Similarly, cheaper electricity offers a win-win for climate and households, as it reduces use of gas heating and petrol cars. But instead of getting the cost of electricity down, we have been loading ever more levies onto bills to fund speculative technologies like hydrogen and CCS.

A new Chancellor can avoid getting sucked into a culture war about climate change, and instead make a pro-climate, pro-consumer case for cheaper electricity. (For a full list of pro-growth policies nearly all political factions can get behind, see here).

Growth is the only solution

When the results began trickling in from our straw poll of gilt market professionals, they painted a remarkably consistent picture. Growth is seen as the only way to get Britain on track. It must be the top priority of whoever the next Prime Minister selects to run the incredibly complex entity that is the Treasury.

Importantly, this is not a view limited to the markets. Public dissatisfaction with stagnant wages and high bills tells the broader story of the challenge facing the next Chancellor. Only growth can be the answer to a politics defined by zero sum battles. Policies for growth pay multiple dividends: not only do they create jobs and rising living standards, they also generate taxation income, and allow the Chancellor to borrow more to invest. Whoever Burnham picks as Chancellor, growth must be the priority.