UK PM Burnham faces fiscal constraints on cost of living

Andy Burnham used his first speech as British prime minister to promise households more "breathing space" from the cost of living. He is expected to outline specific policies on Tuesday. However, he inherits an economy where soaring energy, food and mortgage costs continue to strain consumer finances, a situation recently worsened by the impact of US-Israeli strikes on Iran.

The geopolitical shock underscores the limits of domestic policy in a fragmented global economy. "A more volatile world is a more expensive world," says Adam French, of the financial information service Moneyfacts. When similar cost-of-living interventions were attempted earlier this year by his predecessors, Sir Keir Starmer and Rachel Reeves, external events quickly erased a £150 reduction to annual domestic energy bills.

To deliver relief, Burnham must navigate a narrow fiscal path. He has pledged not to raise the main rates of income tax, National Insurance or VAT, while hinting at unfreezing the personal allowance before April 2031. That current freeze has acted as a stealth tax, and reversing it would require significant alternative revenue. Potential options include aligning capital gains tax with income tax rates or replacing stamp duty and council tax with a new property tax.

Sticking to the government's existing fiscal rules will force difficult trade-offs. "The [resulting] rummage down the back of the sofa for loose change has hit personal finances hard, changed the tax landscape, and makes it more challenging for people to save for their future," says Rachel Vahey, head of public policy at investment platform AJ Bell. Any major tax reform will also create clear winners and losers, risking the kind of political backlash that forced previous policy U-turns.

Household debt highlights the urgency of the situation. Unpaid energy debt has hit a record £4.79 billion, up 15% in a year. "Although average bills have dropped back from their peak, they are still far higher than they were five years ago," says debt charity Citizens Advice. "But incomes and bill support mechanisms have not kept up. Households are left with mounting energy debts, forced to choose between heating and eating."

Burnham’s plan to "bring essentials under public control" and build more council homes offers little immediate market impact. Mortgage costs and borrowing rates will ultimately depend on how financial markets assess his new chancellor's ability to fund these ambitions without breaking fiscal rules. With rail fares already frozen until March 2027, the new government's real test will be whether it can actually shift the economic trajectory, or merely manage a prolonged squeeze.