‘Boring Budget’ would pave way for early election, City fears

Andy Burnham risks triggering a spike in Britain’s borrowing costs if he calls an early election in the wake of this week’s “boring Budget”, City economists have warned. The City is increasingly expecting Mr Burnham to go to the polls next year, with some interpreting John Healey’s expected low-key maiden Budget on Wednesday as a sign the Prime Minister is laying the ground for a snap election. James Smith, from ING Group, said Britain’s “boring” Budget suggested Mr Burnham was planning for such a move. He said “all roads in Britain’s politics increasingly point towards an early election in 2027”. However, City investors have warned that going to the polls earlier than expected would drive up Britain’s borrowing costs and weaken the pound. Mustafa Çaylan, from UBS, said an early election was currently the “biggest political risk” for UK borrowing costs, which are already flirting with 20-year highs. He added: “We would see gilts selling off by probably at least 0.2 percentage points, depending on how willing the government would be to change the fiscal rules, if at all.” Mr Caylan warned that “it could definitely be more” for 10-year gilts if the Government signalled it was calling an election to win a mandate to loosen the fiscal rules which restrict borrowing. A 0.2 point rise would be considered large, with 10-year borrowing costs currently at 5.35pc – near levels last seen in 2007. Gilt yields determine the interest the Government pays to refinance or take out new debt, with the interest bill already costing more than £100bn a year. The national debt has just surpassed £3tn, rising from £2tn in 2020. UBS analysts also warned that a surprise early election would see the pound “trading on the back foot”. Mr Smith, from ING, warned that prediction markets, which currently put the risk of an early election at about 25pc, were underestimating the likelihood of a 2027 general election. “Markets probably wouldn’t like it. There’s a growing recognition that the UK actually looks quite good on fiscal policy. But longer term we have the same pressures as everybody else: defence, ageing, and so on,” he said. The Prime Minister has outlined costly visions, ranging from boosting defence spending to 3pc of GDP , reforming Britain’s broken social care sector and greater public control of utilities. However, he is constrained by Labour’s manifesto pledges, which rule out raising income tax, VAT or employee National Insurance, leaving the Chancellor facing high borrowing costs and few revenue-raising options. Mr Healey is expected to dodge many of these bigger issues at the Budget, instead aiming for a “do-no-harm” approach. Mr Smith said: “An election would be a catalyst for markets to think: how do these big pledges get funded? Is it going to be looser fiscal rules, or is it tough decisions on tax? If you don’t get a Labour majority, do you get more uncertainty? “There’s going to have to be a reckoning with something’s going to have to break. Either it’s the fiscal rules, or it’s probably that commitment not to raise the major tax rate.” Mr Smith said: “Everything in UK politics at the moment seems to point in that direction. When you start looking at the Budget through the lens of an election, its apparent timidity begins to make more sense.” This was echoed by Anna Titareva, pan-European economist at UBS. She added: “The risk of an early election is clearly there. I think most observers were somewhat surprised by the tone of the Prime Minister’s speech at the Labour Party conference. “There was much more focus on the policy outlook and going into the next election than on Budget day, for example. I wouldn’t call it a given, but the risk is clearly there.” It comes after Mr Burnham recently said he wanted to discuss the possibility of bringing Britain back into the EU , in a move widely interpreted as an election play to win over Lib Dem and Green voters. In a separate pre-Budget announcement on Sunday, Mr Healey said the UK would not be joining a Canadian-led defence bank and would opt instead for its own initiative. There had been pressure to join the Canadian fund, known as the Defence, Security and Resilience Bank, which was spearheaded by leader Mark Carney, the country’s now prime minister. However, the Treasury confirmed the UK would push on with its own plan, known as the multilateral defence mechanism. “As they are operationalised, the two institutions will be designed to work in close partnership,” the Treasury said.