What a new prime minister could mean for your money

Former mayor of Manchester Andy Burnham has now received enough nominations from fellow MPs not only to become leader of the Labour Party, but that now no other challenger is mathematically possible. This means Burnham is set to become prime minister on 20 July, the seventh person to hold the position in the past decade.

After several weeks of limbo we're about to get a glimpse at what a Burnham premiership could mean for the nation’s finances. Currently, there's more we don’t know than that which we do, but there have been some clues about the direction Burnham will take when he assumes office.

Who could be the next chancellor?

The first big decision will revolve around who is appointed as Rachel Reeves’ successor at Number 11. Although Reeves could technically be kept on in the job it's been widely reported that this is highly unlikely.

A reminder of how the current tax thresholds can affect you

There are several names in the frame to be the next chancellor, all with different potentials. We’ve picked out four potential candidates that are currently in the running for the role and looked at what they could bring to the top economic job in the country.

Yvette Cooper

Cooper is likely to be considered a safe pair of hands, having deftly jumped from domestic to global affairs of state as part of Starmer’s cabinet. She also spent time in the Treasury under Gordon Brown and is considered to be something of a centrist, which could reassure markets nervous about an Andy Burnham premiership that starts with pledges to turn on the spending taps.

As an MP of a northern constituency, she’s got a good working relationship with Burnham and is one of the most senior politicians in the current cabinet who knows how to be a team player – but also how to raise sensitive issues at the highest level. Her breadth of experience means that she will understand the pressures on the public purse better than many and her seniority could help bring together different factions of the party under a new leader.

Shabana Mahmood

Mahmood has not spoken out on economic issues since her time in the shadow Treasury back when Ed Milband was in charge of the Labour party - who is also in the running for Reeves' job. So, assessing a potential approach relies on extrapolating from her most recent position as home secretary.

She is considered to be measured, pragmatic and disciplined over budgets. If this is carried through into economic policy, it could mean steering clear of radical changes and opting for incremental improvements. The fiscal responsibility may go down well with markets, which had been worried about borrowing and spending under Burnham.

However, the incremental targeted policymaking might not be a natural fit with a prime minister keen to draw a line in the sand.

Pat McFadden

Serving as an adviser to Blair and in Starmer’s cabinet, Pat McFadden might be seen as a safe pair of hands to keep the ship steady. It’s one of the reasons he was made work and pensions secretary after the universal credit U-turn. This could be why he’s considered a potential front-runner for chancellor.

He’s seen as a moderate, so would be likely to promote fiscal responsibility alongside investment in public services and working to improve growth. His private communications, recently made public, show he wanted to move beyond simply thinking of tax as a way to pay for public services, and use the system to promote growth and provide opportunities.

The delicate balance required in this approach is demonstrated by the fact that he stood by the state pension triple lock, while acknowledging the potential problems that raising the state pension age could bring for those in poorer health as they get older. At the same time he also emphasised that the system needs to be affordable and fair.

Ed Miliband

A former leader of the Labour party now potential chancellor and current energy secrtary, Miliband’s position on the soft left might raise the possibility of more spending and borrowing. However, his experience in senior roles, including as a special adviser to Brown, may lie behind reports it was Miliband who helped persuade Burnham of the importance of sticking with the fiscal rules in order to calm the markets.

To balance the books, he might consider more progressive taxes or revisiting tax reliefs that predominantly benefit higher earners. He has previously supported a mansion tax. He might also consider more environmental taxes.

If he was appointed, it could raise questions among business leaders. He has shown support for more government involvement in business and his commitment to net zero has led to criticism from some business leaders and unions. This may impact his chances of being offered the role.

What will Burnham expect of his chancellor?

Whoever is appointed chancellor will be tasked with the not-so-easy-job of balancing the UK's financial books.

Reeves had pledged to just one major fiscal event a year in the autumn to try and build some stability in the bond market. Whether or not Burnham's cabinet will continue with this remains to be seen but there have been recent rumours that the Autumn Budget could be expanded to include a departmental spending review suggest that whatever emerges from Burnham’s inaugural Budget could prove hugely significant. It’s entirely possible this might mean a number of tax reforms and new policies affecting people’s finances.

What a Burnham cabinet could mean for your finances

While the prime minister-in-waiting has committed to uphold Labour’s manifesto pledges, including not raising income tax, employee National Insurance and VAT and maintaining the triple lock for this parliament, it does not rule out longer-term plans running against those promises that stretch beyond the next general election. In the immediate term, there has been speculation that Burnham may consider reforming inheritance tax and council tax, as well as introducing ‘stronger public control’ of key services like energy, transport and water.

In a speech in Manchester in late June, Burnham called for collaboration, including reaching out to other political parties to find common ground to deal with some longer-term economic problems facing the country. 

This could mean the government finally tackles some particularly tough financial issues, such as the sustainability of the triple lock and future of the state pension, bringing stability to pension taxes, solving the problem of pension adequacy and addressing the growing issue of paying for care in older age. With the Pensions Commission set to publish its final report early next year, Burnham could use it to leverage cross-industry and cross-party collaboration to lay a blueprint for taking on any number of these issues.

Bond markets braced for Burnham

Bond investors will be watching political events like a hawk as a change in chancellor could have a major influence on gilt yields. Bond markets hate uncertainty and there are fears that the new chancellor might steer the ship in a slightly different direction to Reeves.

Gilt yields have risen since March primarily because of a shift in interest rate expectations linked to the Iran war and oil prices going up. However, with political uncertainty added to the mix and there is the potential for yields to go up further once the new prime minister decides on who will be chancellor.

A lot will depend on the growth, taxation and spending policies. These might not be forthcoming, which means bond markets could become more volatile in the near-term as speculation is likely to intensify around what the new top team will do in their inaugural Budget later this year.

Starmer passes the baton – what legacy does he leave behind?

Two years on from Labour’s landslide election victory in July 2024, Starmer and Reeves have left a lasting imprint on the UK’s personal finance landscape – but not one many households will welcome. Few have been spared punishment in a multi-billion pound tax raising exercise that has hammered workers, pensioners and savers alike.

While their time in charge of the country and the economy may end sooner than many expected – and under difficult circumstances – the tax rises, cuts to incentives and other policy decisions introduced during their tenure are set to leave many families worse off. The financial consequences of those decisions will continue to weigh on household budgets, savings and retirement planning for years to come.

Reeves has struggled to balance the nation’s books, having been boxed into a corner early on with Labour’s manifesto promise not to increase income tax, National Insurance or VAT for ‘working people’ as well as an unwavering dedication to following the fiscal rules.

Faced with mounting economic pressures – including a large fiscal deficit, rising government borrowing costs, and the lingering economic impact of Brexit and the war in Ukraine – Reeves has sought to shore up the public finances through a series of tax rises. She has overseen two of the biggest tax-raising Budgets in recent history, with the 2024 Budget raising around £40 billion a year and the 2025 Budget adding a further £26 billion.

This rummage down the back of the sofa for loose change has hit personal finances hard, changed the tax landscape, and makes it more challenging for people to save for their future.

The freeze on income tax thresholds could go down as one of the defining tax legacies of the Starmer-Reeves government. Although the policy began under Boris Johnson and Rishi Sunak as a temporary post-pandemic measure and was subsequently extended under Jeremy Hunt, Labour’s decision to extend the freeze further until 2031 has transformed it into a decade-long stealth tax raid.

By holding thresholds still while wages continue to rise, millions more workers are being pulled into paying tax or pushed into higher tax bands without any headline increase in tax rates. It means many people will find a growing share of their pay packet disappearing to HMRC, even if their spending power hasn’t improved by the same amount.

For higher-rate taxpayers the effect is particularly stark. By the end of the freeze, someone earning £75,000 could be paying almost £4,800 a year more in income tax than if thresholds had risen with inflation. It’s a reminder that governments don’t always need to raise tax rates to increase the tax burden.

Among the other policies implemented under the departing Starmer-Reeves double act are hikes to the rates of capital gains tax in October 2024 and dividend tax in April this year. On top of this is the widely lamented decision to bring unused pension funds into the estate for IHT in April 2027 and the misguided cut to the Cash ISA allowance to £12,000 for under 65s also from next April. For an administration that repeatedly brandished its mission statement to foster a culture of retail investing among Brits to help boost economic growth, it has decidedly opted to use far more stick than carrot.

The baton being passed to Burnham is expected to involve the rollout of these policies, but there is still time for sensible adjustments to be made that do not impose a significant administrative burden on the families of deceased loved ones or unleash needless complexity and tax charges on the ISA market.