Andy Burnham needs a new fiscal strategy that deals with the tax lock

Andy Burnham will become prime minister on 20 July. He, and whoever he picks as his chancellor, will inherit a similarly difficult fiscal position to that which welcomed Starmer and Rachel Reeves into office in 2024, and which would go on to dominate policy and political discourse over the past two years. 

Burnham has ambitions to address problems that could have hefty upfront costs attached – such as scaling up council house building and social care reform. It will be difficult to do that within the existing spending envelope. He will not be able to pretend there is money to fund every priority without raising taxes or making cuts elsewhere.

Burnham has also inherited Starmer’s manifesto “tax lock” pledge not to raise the main rates of income tax, (employee) national insurance and VAT. This has tied Starmer and Reeves’ hands, forcing them into clunky workarounds, such as the increase in employers’ national insurance, which damaged business confidence and left many voters feeling as though Labour had broken its pledge anyway. 

That leaves Burnham caught between two politically unpalatable positions. Stick with a pledge that will make it much harder to deliver the change he wants – or abandon it and risk the electorate’s ire. Starmer and Reeves showed the impossibility of the former. Despite very real political risks, should Burnham find he needs to increase taxes materially to deliver his agenda, dropping the tax lock is the better path. 

The new government will face many fiscal pressures

Some of Starmer and Reeves’ choices have improved Burnham’s fiscal inheritance. Multi-year departmental budgets until 2028/29 have been set through the spending review, and the March spring forecast showed that Reeves had over £20bn of ‘headroom’ against her fiscal rules – more than chancellors have typically left in recent years, although still relatively small compared to the 2010s. 

Yet the OBR was signalling that the Spring Forecast was out of date even as Reeves was presenting it in parliament. The Iran crisis, which erupted just a few days before the chancellor delivered the statement in the Commons, was therefore not factored into those numbers; the fiscal forecast at Burnham’s first budget is likely to be worse: 

• Higher interest rates alone could add over £5bn to borrowing. 
• Other forecasters have also downgraded growth prospects, which could reduce tax receipts by a further £5bn.
• Higher inflation will also mean spending plans for the next few years are less generous, especially if pay review bodies recommend higher pay awards to compensate public sector workers. Just restoring the real-terms generosity of departmental budgets would cost a further £5bn.

This last point could prompt the next chancellor to go further still on public services, not least as Reeves frontloaded those spending plans. Real-terms day-to-day spending was planned to increase by over 3.2% between 2023/24 and 2025/26 – a larger increase than every spending review since 2002 – but then from this year just 1.2% per year. This strategy has led to some immediate improvement in public service performance, but many services, like the NHS and adult social care, are still just treading water. 

While several reforms are under way in different services, big productivity gains in the next couple of years are still very uncertain. Add in £1bn per year of unfunded defence spending increases, and these plans look increasingly implausible. 

Burnham will need to balance his spending plans with very real fiscal constraints 

What we know about Burnham’s plans for government so far points to more spending rather than less. Reports suggest he wants to reform social care, a longstanding policy problem with which he is right to grapple but which also comes with a price tag (potentially in the billions, depending on the reforms chosen). Burnham has talked about welfare reform, but finding substantial short-term savings will be difficult. As a new prime minister he will find he has other new priorities too.

Burnham has, sensibly, re-committed to the government’s fiscal rules. They are broadly well-designed and the main limitation on UK government borrowing is currently the willingness of the market to lend at reasonable rates. The rules help to bolster the new PM’s credibility. 

However, Burnham also appears to have re-committed to the tax manifesto pledge, which takes many of the least economically damaging revenue raisers off the table. In doing this, he risks falling into the very same trap as Starmer and Reeves. Ruling out more straightforward tax rises also made it harder for the government to build a big enough fiscal buffer to be resilient to shocks – which helped drive the rushed and ill-fated welfare reforms of Spring 2025 that played a key part in Starmer’s downfall. 

Burnham’s fiscal strategy should confront the tax lock

The next prime minister’s first weeks in office – when governments are often at their most popular – are an opportunity for Burnham to develop a credible overarching plan, backed up by a fiscal strategy consistent with his ambitions and the fiscal rules to which he has rightly re-committed. 

This should include setting out a strategy on tax, where there are many options to reform the system to make it less damaging to growth, fairer and simpler while raising some money. Burnham has already mentioned reforming taxation of property and capital gains. But if he wants to raise revenue, he should be open to looking again at the major taxes even if it means ditching the tax lock.
History shows the risk of breaking totemic manifesto commitments. Nick Clegg has argued that his decision to abandon the Liberal Democrats’ manifesto promise on tuition fees eroded voters’ trust in the party on other key issues. Burnham will justifiably fear the same and will know that abandoning this damaging pledge will be seized on by political opponents.

But the risk may well be worth it. Manifesto commitments should be taken seriously, but the tax lock was always a bad pledge – as we said at the time – and reflected the failure of both the main parties at the 2024 election to confront the UK’s difficult fiscal position. Abandoning it would increase Burnham’s scope to deliver public service and broader improvements in this parliament without relying on more distortive tax rises.

Doing so would be an immediate test of Burnham’s leadership. Can he be honest with the public and find a framing that makes breaking the pledge more acceptable to voters?

Burnham and his chancellor must act soon

If he does decide to abandon the pledge, he should do it quickly. The Starmer government missed opportunities in office to reframe the debate. A change of leadership creates another moment to do that. Burnham can point to the international situation – Trump’s second term, a barely open Strait of Hormuz, the dire need for investment in defence – as a fundamentally different context to 2024. He could argue that he needs credible fiscal approach that meets the scale of the challenge. Dropping Starmer’s pledge will not be politically easy – but, as the last two years have shown, the political cost of failing to confront this reality could be even greater.