The UK’s newly appointed Prime Minister, Andy Burnham, has bypassed the two leading contenders for Chancellor, selecting John Healey over Shabana Mahmood in a decision that sidelines the candidate many investors viewed as a source of fiscal discipline.
Instead, Burnham opted for Healey, a former Defence Secretary whose Treasury experience dates back more than 20 years, ahead of both Mahmood and Ed Miliband.
According to government insiders, Healey was chosen for his ability to implement the Prime Minister’s agenda rather than pursue an independent economic vision.
As I talked about to CNBC, and featured in the Daily Express, Reuters, Investing.com, Investor Ideas, Pound Sterling Live, London Loves Business, Business Money, IFA Magazine, Money Marketing, Financial Planning Today, Share Café, and Mortgage Strategy, amongst other media, recent gains in UK markets were driven by hopes that a fiscally disciplined Chancellor would temper Burnham’s approach to taxation. That expectation has now faded, leaving investors with reason to re-evaluate the pricing of UK assets.
Why Healey’s Appointment Has Changed Market Expectations
The recent calm in financial markets was underpinned by expectations that the Treasury would be led by a fiscally disciplined Chancellor. Instead, Burnham has appointed a politician with a history of backing higher public spending and, according to Downing Street, a remit to implement rather than moderate the Prime Minister’s agenda.
That represents a significantly different risk profile from the one investors had priced in at the end of last week.
Indeed, the surprise choice of John Healey as Chancellor is unlikely to reassure investors worried about Burnham’s fiscal instincts, particularly on borrowing and spending.
Gilt yields retreated, and sterling strengthened following Healey’s appointment, reversing some of the market reaction triggered by Burnham’s first remarks as Prime Minister, which had sent 10-year yields up eight basis points to 5.049% and lifted 30-year borrowing costs to their highest level since late May.
Healey may now lead the Treasury, but the direction of the government will be set by Burnham. Within a day of taking office, the PM unsettled bond markets by pledging a “new economic model” and signalling he would exploit “any flexibility” within the fiscal rules. Healey’s appointment does little to alter that underlying concern.
What Healey’s Record Suggests for Fiscal Policy
Healey’s track record also suggests he is unlikely to act as a brake on Burnham’s spending ambitions.
During his time as Defence Secretary, Healey was best known for pressing the Treasury for increased funding, a position he maintained until leaving Keir Starmer’s government.
Now, he finds himself in charge of the public finances. While Healey may influence how any fiscal flexibility is deployed, there is little indication that his role is to curb the Prime Minister’s broader economic agenda. Rather, his appointment appears focused on implementing that agenda, not restraining it.
Healey’s appointment should not be interpreted as a sign that the government’s willingness to spend has diminished. Instead, it suggests Burnham recognises the importance of reassuring financial markets while shaping the direction of his economic agenda.
Against that backdrop, now may be the time for investors to prepare rather than become complacent. Gilt yields near five-week lows and a modest recovery in sterling appear to reflect relief that Monday’s sharp market reaction did not continue, rather than a fundamental shift in the fiscal outlook.
How Investors Can Prepare for Renewed Volatility
Investors may therefore want to reassess their exposure to UK government bonds, diversify sterling-denominated assets where appropriate, and stress-test portfolios against the possibility of renewed market volatility.
Taking these steps during a period of relative calm could prove more effective than reacting after future fiscal announcements, should government borrowing increase further.
So far, markets appear to have responded more to the appointment itself and the absence of further immediate shocks than to any meaningful change in fiscal policy. History suggests that such relief rallies can prove short-lived if they are not backed by a credible policy framework.
Unless Burnham clearly signals that additional borrowing will remain constrained, the appointment of an experienced and well-regarded Chancellor alone is unlikely to eliminate concerns over the government’s fiscal direction.
Ultimately, investors will judge the UK not by personnel changes, but by the policies that follow and whether they reinforce confidence in the country’s long-term public finances.
To read my previous blog post, click here.