Burnham must double down on cost-of-living freebies in first Budget

At the 2019 general election, the Conservative Party beat Labour among mortgage holders by 10 percentage points. Between the winter of 2021 and the summer of 2023, the Bank of England raised interest rates 14 times in a row. Sir Keir Starmer, my old boss, used Prime Minister’s Questions (PMQs) to ask about a police officer called James from Selby, whose mortgage had gone up by £400 a month. A police officer in a bellwether constituency having to downsize and put his kids into a shared bedroom is a warning sign for any government.

Some 7.5 million households were in the same boat as James by the time of the 2024 general election, and Labour beat the Tories among mortgage holders by 17 points. There is a Labour MP in Selby who will ask James to reelect him in 2029 and, because of the war in Iran , markets think the Bank may have to raise interest rates to curb inflation. That is why Andy Burnham is right to have grounded his economic strategy in the cost of essentials.

Some will have advised the Prime Minister that it is a hostage to fortune to take political responsibility for the cost of living when the causes of the crisis are global. But voters aren’t stupid. They don’t want politicians to pretend to be masters of the universe, but they do want them to exercise the agency they do have rather than act as passive victims of forces beyond their control. The relentless drumbeat of small pro-consumer measures can earn the Government credit for doing what it can, but only if they sit beneath a larger strategy to bring down the bigger bills, such as mortgages, that really hit living standards.

It starts with fiscal responsibility. Lending to a household is inherently riskier than lending to the Government. So lenders will only do so if the rate of return is better. If the Government fails to keep its own borrowing costs down, then it inevitably pushes up the costs for James and the rest of us. As the International Monetary Fund (IMF) pointed out, the UK has already taken the necessary steps on fiscal consolidation. It did so, at short-term political cost, by raising taxes to levels where the public finances could improve while it invested in renewing its infrastructure and public services.

The Government’s electoral coalition leaves it in hock to Britain’s mortgage payers and those who want to see a renewal of the public realm, so it must stay the course. There are things the Government can then do to create the space for the Bank to stave off raising rates and eventually add to the six cuts it has already implemented under Starmer and Rachel Reeves once the Iran conflict has abated. The first is to spend any additional fiscal room that it has on mechanically cutting the rate of inflation.

When inflation is high, it matters that cutting energy bills directly reduces the headline rate of inflation but cutting council tax does not. Many prices in the economy, such as contract renewals, rent increases and benefits increases, are directly linked to the consumer prices index (CPI). Cutting them, therefore, takes wider inflationary pressure out of the economy and can give the Bank more confidence that it needs to hold and then eventually lower rates.

If the Government can afford any more cost-of-living support, it should add to the VAT cut to energy prices it has already announced rather than looking at measures that do not have this important effect. The second is to continue supply-side reform of the economy. Welfare reform, airport expansion and curbs on judicial review are needed to ensure that Britain continues to grow faster than its peers. They also mean we can absorb increased demand and much-needed government investment into the economy without price increases.

They reduce the cost of building essential infrastructure such as transport, housing and energy – costs that are always passed on to consumers. The near-term effects may seem limited, but a government visibly determined to deliver the reforms needed to increase capacity in the economy will always have an easier time with inflation expectations than one that isn’t. Finally, the world of trade is changing and we cannot be naive about the effect of unfair competition on UK strategic assets.

But to be prosperous we have to be an open economy that welcomes fair competition. That is why the Prime Minister is right to want to push ahead with an EU deal which, as well as boosting our exporters, will help with the cost of food, energy and manufactured goods. He is also seeking a bigger prize. UK participation in various Made in Europe schemes will keep our economies open to each other. More importantly, it will reset our relationship from one about managing a messy divorce to that of a common security project.

That will no doubt require trade-offs on youth mobility, ministerial ambitions to buy everything British, and more, but the chance must be seized. The Budget will be about more than inflation. Hope cannot be nourished by fiscal responsibility alone. The change expected by voters of Labour governments is greater than bringing interest rates down. But for a government that wants to be reelected by James from Selby on its record on the cost of living, just about nothing is more important.

At the Budget and in the coming months, there is plenty of opportunity, but it will require continuing resolutely with the fundamentals of an economic strategy that is working. Stuart Ingham is a former director of No 10’s Policy Unit