UK Prime Minister Keir Starmer said on Monday that he would step down as Labour leader and prime minister, ending months of political turmoil and setting in motion a leadership contest that is increasingly expected to deliver Andy Burnham to Downing Street.
The announcement comes less than two years after Starmer led Labour to one of its largest parliamentary majorities in the 2024 general election.
However, his government has struggled with growing dissatisfaction over fiscal policy, welfare reforms, and internal disputes, including criticism surrounding the appointment of Peter Mandelson, an associate of the late sex offender Jeffrey Epstein, as US ambassador.
Public sentiment had also turned increasingly negative.
An Ipsos poll published on Friday showed that 52% of Britons believed Starmer should resign as prime minister, up five percentage points from May, while only 35% thought he should remain in office.
Burnham emerges as overwhelming favourite
Andy Burnham confirmed on Monday that he would seek to replace Starmer, saying he would offer Britain “stability, seriousness and a continued focus on the issues that matter most”.
The contest appears increasingly one-sided after former health secretary Wes Streeting ruled himself out of the race.
No other senior Labour figures have publicly indicated plans to stand, making Burnham the overwhelming favourite to succeed Starmer.
Users on online prediction platform Polymarket currently assign a 96% probability to Burnham becoming Britain’s next prime minister.
Burnham has also spoken of a “final chance to change” Britain and has outlined a broader vision for the economy that includes lowering water and energy bills, reducing rail fares, and promoting the “re-industrialisation” of northern England.
Markets remain calm but questions linger
Financial markets reacted calmly to the political upheaval.
The pound edged down to around $1.32, while yields on benchmark 10-year gilts held near 4.82%.
The FTSE 100 was broadly flat initially and later traded around 0.5% higher.
The domestically focused FTSE 250 initially dropped 0.6% to one-week lows before recovering some losses to trade down around 0.27%.
Investors appear to be taking comfort from expectations of policy continuity, particularly if Burnham adheres to Labour’s existing fiscal rules.
However, markets are also mindful that Burnham has previously advocated looser spending policies.
In September, he said the government should not be “in hock” to bond markets, remarks that raised concerns among investors.
More recently, however, he has adopted a more market-friendly tone and enlisted a former Bank of England chief economist as an adviser.
Burnham has also pledged not to increase income tax or national insurance contributions for working people.
Fiscal policy becomes the key market focus
Analysts say the biggest test for financial markets will be whether a Burnham government remains committed to fiscal discipline.
Michael Pfister and Hauke Siemßen, strategists at Commerzbank, said investors will closely scrutinise Burnham’s policy intentions.
“We think the main topics will now be whether Burnham will face competition in his leadership challenge (although he is probably the favourite) and, if he is elected, whether he will adhere to the fiscal rules (as he has suggested over the last couple of weeks) or be more open to increased spending (in line with his previous views).”
The strategists added: “We believe that the market is not fully pricing in the prospect of an even more loose fiscal policy; the recent gilt movements are better explained by global factors. Therefore, we still see potential for a steeper yield curve and a weaker pound over the next couple of weeks.”
Choice of chancellor the most important near-term decision for markets
Analysts broadly agree that the most important near-term decision will be the choice of chancellor.
“Incumbent Chancellor Rachel Reeves has successfully mitigated market concerns via a strong commitment to the fiscal rule — markets will search for similar reassurances from her successor,” ING analyst Francesco Pesole wrote.
Dan Coatsworth, head of markets at AJ Bell, said: “Burnham’s choice of chancellor if he becomes prime minister could have a major impact on bond markets.”
“Bond investors like boring and dull – they want someone who has a plan where the maths stacks up, and they stick to it.”
Russ Mould, investment director at AJ Bell, echoed those concerns.
“Bond markets already rate the UK as higher risk, as illustrated by the rise in gilt yields this year. There is potential for gilt yields to go even higher if markets worry about who might become the next chancellor and if there will be radically different policies under a new prime minister.”
Investors wary of spending ambitions
Memories of former Conservative Prime Minister Liz Truss’s mini-budget in September 2022 continue to influence market thinking.
That fiscal package triggered a sharp selloff in gilts and a collapse in sterling, cementing investor sensitivity to unfunded spending plans.
Analysts at JPMorgan, led by Andrew Tyler, said there is “certainly room for fiscal risk premium expansion but it’s more likely to be towards the end of summer.”
The bank expects borrowing costs to rise eventually as investors assess the possibility that Burnham could pursue policies involving greater state involvement and a reversal of some privatisation measures.
Economists at Pantheon Macroeconomics also see risks tilted toward higher spending.
Rob Wood and Elliott Jordan-Doak said Burnham could “pitch to Labour MPs’ left-leaning instincts for more spending, funded by higher taxes and moderately looser fiscal rules, as well as additional regulation”.
However, they added that he would likely avoid dramatic fiscal shifts because he would want to avoid a repeat of the gilt market turmoil that damaged the Conservatives’ reputation for economic management.
Kathleen Brooks, research director at XTB, said Burnham’s spending and nationalisation ambitions “could threaten to unleash another wave of inflation on the UK economy”.
She added that Burnham would have to “work to persuade financial markets that he is the right man for the job to grow the UK economy and get debt back under control”.
Citigroup strategists also see the possibility of higher borrowing costs even if fiscal rules remain intact, arguing that political uncertainty and concerns over increased government borrowing could push 10-year gilt yields toward a range of 5% to 5.25%.
For now, investors appear content to wait for more clarity.
But with a new prime minister likely to take office within weeks, financial markets are increasingly focused on one question: whether Britain’s next government can balance growth ambitions with fiscal credibility.
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