The upcoming Makerfield by-election has financial markets on edge, with analysts warning that Andy Burnham's potential victory could send the pound plummeting and taxes soaring. While the election result itself may not be the primary concern for investors, the implications of a Burnham-led administration are significant.
Personally, I think the markets are underestimating the risks associated with this election. The fact that Burnham is the clear favourite, with implied probabilities of 70-80%, suggests that investors are already pricing in a certain level of risk. However, the potential impact on fiscal policy and government borrowing could be substantial.
One thing that immediately stands out is the focus on Burnham's policy positions. Reports suggest that he could support proposals for a basic income for vulnerable individuals, set against a welfare budget of around £323 billion for 2025-26. This raises a deeper question: how will the markets react to such a significant shift in public spending?
From my perspective, the markets are likely to view a Burnham-led administration as signalling a shift towards higher public spending and taxation. This could place downward pressure on sterling as investors brace for a more expansionary fiscal stance, larger bond issuance, and another increase in the tax burden.
What many people don't realize is that the impact of this election could extend beyond the UK. The markets are closely watching the outcome, and any significant move in sterling could have global implications. This is particularly interesting given the ongoing uncertainty surrounding the political outlook, including the future of Keir Starmer's leadership.
In my opinion, the markets are not fully accounting for the potential impact of this election on the UK's fiscal policy and government borrowing. The focus on Burnham's policy positions and the potential for a shift towards higher public spending and taxation could have a significant impact on sterling and UK bonds.
Looking ahead, it's clear that the markets will be closely monitoring both the outcome of the by-election and any subsequent policy signals emerging from Westminster. The implications of a Burnham victory could be far-reaching, and investors will need to reassess their expectations for UK fiscal policy and government borrowing.
