Wealth taxes, nationalised water, and more borrowing: what Andy Burnham might mean for your wallet

In the short term, not much. We don’t yet know who the next PM will be, but Andy Burnham is the overwhelming favourite, and may become Labour leader very quickly, if he ends up being the only leadership contestant.

Whoever does take power will inherit the same difficult fiscal backdrop and quickly discover there are no easy wins. Sluggish growth, stretched public services and strained public finances mean difficult choices have been deferred, not avoided.

Political upheaval can create uncertainty that affects markets, confidence and expectations. It’s probably worth coming back to the bond markets, the ones that Andy Burnham infamously did not want to be “in hock to”. 

To recap, the Government spends more than it raises in taxes and has to borrow money to cover the deficit. It does so by issuing bonds and the interest rate on these is set by the market i.e. the people that are lending the money.

In general, the more the Government needs to borrow, the higher the interest it has to pay on its debt. This is known as the yield, and whoever is Chancellor won’t want to see any headlines that refer to “yields rising”; it means more interest to pay.

So why does this matter for households, very few of whom will be buying government bonds? The interest rate the Government pays will be closely linked to long-term interest rates used to set mortgage payments. If a new Burnham government looks likely to increase borrowing, this could lead to higher mortgage rates for households.

There are, however, some constraints. The Government’s fiscal position remains tight, and recent experience has reinforced just how quickly bond markets can respond to perceived policy missteps. In that context, it appears Burnham is mindful of those constraints. Ultimately, the only way to avoid being “in hock” to bond markets is simply not to borrow any money. The Government hasn’t done that since the turn of the century.

It is also worth considering whether taxes will have to rise if borrowing is off the agenda. Little is clear here, as few policy positions have been announced, though Burnham has indicated he supports a Land Value Tax that could even replace Council Tax and Stamp Duty. While possible, this is not the type of major structural change that could be introduced in the short term.

We can also expect to hear commentary about wealth taxes being introduced, and there may be further tax increases here. Rachel Reeves has already increased the tax rate on capital gains and dividends, with a rise in the tax on interest and rent due next year.

We would avoid taking any knee-jerk action based solely on rumour and recommend investors continue to take advantage of tax-efficient wrappers such as ISAs and pensions, maintain a diversified investment strategy, and focus on the fundamentals that remain within their control.

Our analysis suggests that as much as £100bn of wealth could either leave the UK or be redirected into less productive assets from a tax perspective if a levy on the wealthy were introduced. Such a policy could easily prove self-defeating.

Finally, we know Burnham has made many references to bringing some utilities, such as water, back under state control. Whether this would lead to any reduction in household costs remains to be seen, as nationalisation would not be free and energy costs are partly set by global markets. Nonetheless, expect any future Chancellor to make some sort of announcement on this at future Budgets, even if it has a fairly limited impact on the average household.

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Ed Wood is Financial Planning Director at Rathbones.

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