Key Takeaways
- With Andy Burnham expected to be the next prime minister, a new chancellor comes at a critical time for UK markets and the economy.
- Investors worry there will be changes to the UK’s strict fiscal rules, prompting further increases in gilt yields.
- Energy secretary Ed Miliband is seen as the front-runner for the role, but other experienced ministers like Pat McFadden could be rewarded with the role.
With a transition of power to Makerfield MP Andy Burnham now near-certain, UK financial markets are focused on who will be the new prime minister’s chancellor. The decision is the most critical appointment Burnham will make and is expected to come soon after his ascension to the country’s top political job in the coming days.
The marginal front-runner for the role is the current energy secretary—and former Labour leader—Ed Miliband, according to oddsmakers. Miliband, who once defeated his brother to become Labour leader on a platform of “centre-left” policies in 2010, is now seen as an elder statesman in the Party. His almost defiant support for green energy is also perceived as problematic for currency and bond markets, however. That could mean someone else who is perceived as a “safer pair of hands” could get the job. This could be Starmer loyalist Pat McFadden or maybe even current Foreign Secretary Yvette Cooper.
“Prime ministers and chancellors are a pivotal double-act of the UK government. The question is whether the next dynamic duo will adopt a similar approach to Starmer and Reeves, or head down another route entirely,” says Sarah Coles, head of personal finance at AJ Bell.
The news comes as the UK’s fiscal watchdog, the Office for Budget Responsibility, warns the UK government must act to reverse the country’s “unsustainable” public debt pile, and as already-jittery bond markets react to fresh political developments. It also comes amid huge spending commitments elsewhere—notably in defense and welfare—that Burnham must carefully manage. Internationally, Burnham will also have to navigate difficult and costly diplomatic decisions, including how much the UK contributes to NATO and Ukraine.
Will Ed Miliband Be the Next Chancellor?
The elevation of Ed Miliband to the role of chancellor would have been almost unthinkable a decade ago. Fresh from a painful defeat at the 2015 general election, Miliband resigned as Labour leader, triggering a leadership contest that resulted in the ascent of Jeremy Corbyn and the resignation of challenger Andy Burnham as an MP in 2016. Things have since come full circle. Burnham has reestablished himself as a progressive Manchester mayor and a voice for the north of England. Miliband is now seen as a party grandee. Corbyn has left Labour altogether.
Markets may see the potential for a Miliband chancellorship as a threat to the UK’s two key fiscal rules, but reports also suggest Miliband was among the figures who convinced Burnham to commit to them. The first means government budgets must be in balance or surplus by 2029/30, at which point the Treasury should only borrow to invest. The second means net financial debt should fall as a share of the economy by 2029/30. Bond markets are watching these commitments closely. A firm commitment from the next chancellor to the rules would be something of a reversal from the position one Burnham-backing MP outlined in May: that bond markets would have to “fall in line” with a Burnham agenda.
Sticking to those rules would likely come with higher taxes on some corners of the UK economy, analysts say. “To balance the books, [Miliband] might consider more progressive taxes or revisiting tax reliefs that predominantly benefit higher earners. He has previously supported a mansion tax. He might also consider more environmental taxes,” says AJ Bell’s Coles. An overhaul of stamp duty, council tax, and capital gains tax on disposals is also highly likely.
Much has happened in the last five years, but investors well remember the bond market shocks that accompanied the “revolving door” era of prime ministers as recently as 2022. Most notably, when Liz Truss became the shortest-serving prime minister in UK political history following an unfunded “mini-Budget” that announced tax cuts that bond markets simply could not account for. While there is little suggestion Burnham will break Truss’s record, the 10-year gilt remains elevated above its mini-Budget crisis levels. The chart below reflects changes to UK inflation and interest rate expectations, global economic forces, as well as increased UK political risk.
Burnham “will probably conclude that there isn’t a long list of options for sustainably increasing tax revenue and accelerating economic growth in the short-term,” says Richard Flax, chief investment officer at Moneyfarm. “The memory of Liz Truss still looms large,” he adds.
It also remains to be seen how a Miliband chancellorship could affect currency markets. When Keir Starmer resigned, the pounds fell against the dollar as investors voted with their feet on UK political instability and the spending implications of a centre-left chancellor.
“We see [a Miliband chancellorship] as a clear negative for GBP given his preference for expansionary fiscal policy—in particular, ramped-up spending on the green transition,” says Matthew Ryan, head of market strategy at FX trading platform Ebury.
Who Else Could Replace Rachel Reeves?
A number of other candidates offer Burnham both a break from the past and elements of political continuity after many months of party division. The next-most likely candidate after Ed Miliband is Work and Pensions Secretary Pat McFadden, oddsmakers say. McFadden ran the Labour Party’s campaign for reelection in 2024 and repeatedly defended Keir Starmer in the media as pressure on the prime minister mounted in the first half of the year. McFadden is seen as an experienced and serious political operator and a good potential “unity chancellor.”
“He’s seen as a moderate, so would be likely to promote fiscal responsibility alongside investment in public services and working to improve growth,” Coles says.
One notable policy that aligns McFadden with Burnham is their support for the state pension triple lock, an expensive spending commitment that uprates the state pension annually by the higher of inflation, earnings, or 2.5%. Burnham has very recently said he would keep the mechanism to protect pensioner earnings. Critics say the policy is unaffordable and unsustainable. The OBR says the policy has played a role in putting the UK’s public finances on an unsustainable footing.
Will Burnham Reward Loyalty or Prioritize Market Confidence?
In selecting his chancellor, Andy Burnham will have to decide how much he wishes to break from the past. Other candidates for the role include New Labour veteran and Foreign Secretary Yvette Cooper and recently departed Defense Secretary John Healey, whose resignation over inadequate defense spending followed many months of public support for Starmer. But Burnham must also decide how much he wishes to change Westminster’s informal patterns of patronage.
Here, he will have to do something about Wes Streeting, the former health secretary whose resignation in May served to make Keir Starmer’s position further untenable. Streeting has allowed Burnham to stand unopposed, leading many to believe he will now have to be rewarded with one of the four “great offices of state.” Though it’s unclear precisely what kind of chancellor Streeting would be, markets perceive the Ilford North MP as someone who can make difficult decisions.
“Wes Streeting’s centrist credentials would make him a popular choice to win over markets, which have so far been muted in their response to the political upheaval,” Coles says.
As events unfold, markets will care more about clarity and longevity than party dynamics and patronage.
“Of more immediate interest to the gilt market is who Burnham will choose as chancellor and on this subject he remains tight-lipped,” says Rupert Thompson, chief economist at IBOSS.
