Credit Rating Agencies Examine Burnham's Impact on UK Fiscal Policy
Analysis of Potential Fiscal Policy Shifts and Market Reactions
By Marc Jones
Burnham's Political Rise and Fiscal Policy Outlook
LONDON, June 16 (Reuters) - Credit rating agencies weighing how Andy Burnham could shape Britain's public finances as prime minister expect any bold fiscal policy shifts to be constrained by bond markets for now.
Greater Manchester mayor Burnham is contesting a by-election on Thursday which, if he wins, would propel him back into parliament and into pole position to challenge Prime Minister Keir Starmer for the leadership of the ruling Labour party.
Burnham is seen as more interventionist than the struggling Starmer, but analysts say the potential switch comes at a delicate moment for Britain, with limited fiscal headroom and memories of the 2022 Liz Truss market turmoil still raw.
Credit Rating Agencies' Perspectives
Moody's sovereign analyst Marie Diron said that while Burnham may be constrained by the risk of a repeat of that crisis, rating firms will focus on the policy changes that he - or any new prime minister - ultimately delivers.
"There might be statements made by would-be future leadership candidates (about providing more fiscal support), but it is likely that the reality (of tight finances) is going to come in the way of the more ambitious actions," Diron said.
"What would be more significant for the rating is, as a result of what we are seeing, a major shift in policy."
Market Uncertainty and Spending Pressures
Still, the uncertainty alone has already unsettled markets, while pressure for more spending on key priorities is mounting.
Starmer's defence minister John Healey and armed forces minister Al Carns both resigned last week, with Healey saying Britain's defence investment plan fell "well short of what is required for defence of the country at this dangerous time."
Burnham has also said Britain's most troubled water company, Thames Water, should be nationalised, potentially alongside other key public utilities.
Fiscal Ratings and Policy Constraints
Fitch and the Limits of Fiscal Flexibility
Fitch's head of Western European sovereigns, Federico Barriga-Salazar, said its AA- rating for Britain assumes a gradual "improvement" in the fiscal position, leaving limited tolerance for slippage.
"If that (improvement) doesn't happen, then we would have to reassess," Barriga-Salazar said.
He added that while a new prime minister could seek to change the government's fiscal rules to allow more spending, that would not affect the rating process.
"What we care about is the ultimate trajectory of public debt and public deficit," Barriga-Salazar said.
Scenarios for the UK's Fiscal Outlook
SCENARIOS
Burnham said earlier this month that his plans would be bound by the government's existing fiscal rules.
With UK debt already around 100% of GDP, Scope Ratings analyst Thomas Gillet outlined two scenarios for the rating.
Scenario 1: Quick Resolution and Debt Stabilisation
If government leadership and the Iran war are resolved quickly, "stabilising debt-to-GDP would remain challenging and take time, but it would be possible," Gillet said.
Scenario 2: Prolonged Uncertainty and Market Scrutiny
"More concerning" would be prolonged uncertainty, pushing up borrowing costs and intensifying market scrutiny.
"The question would then be, to what extent the government could stabilise the debt-to-GDP ratio," Gillet said. "It could be a bit like what we saw in 2022 with the (Liz Truss-led) Conservative party."
Other Agencies' Views on UK Ratings
S&P Global has also said the main risk to its AA 'stable' rating is if fiscal or external performance deteriorates significantly beyond its April forecasts of a 4.7% deficit and 1.1% GDP growth.
At that time, it was flagging the risk that Starmer could face a leadership challenge.
Julia Specht at Morningstar DBRS said a leadership change should not have a "material impact" on its UK rating, though it would monitor potential fiscal implications.
"Over the medium term, this could add pressure to the debt trajectory," she said.
(Reporting by Marc Jones. Editing by Mark Potter)
