Prime ministers who resign are almost always the architects of their own downfall. Most have to be nudged to walk the plank. Keir Starmer is no exception in either regard. Instead of his expected 10 years at No 10, he has been pushed out after only two.
The ‘biggest job in the country’ extends far beyond the economy, as does voter frustration, but economic stewardship is the largest part of it. Instead of strong growth, economic stability, cheap energy and housing, and no tax rises – all of which the electorate was promised – growth has been weak, employment opportunities have shrunk, the tax take has soared and welfare dependency continues to rise. There have been freebie and stamp duty scandals, tax raids on farmers, businesses, pensioners, pension pots and even Isas, U-turns, questionable appointments and a failure to demonstrate leadership on welfare reform, energy and defence.
Starmer has not been helped by his appointment of Rachel Reeves as chancellor. For all the talk of a shocking discovery back in July 2024 of a “£22bn black hole”, the nation’s finances are worse than ever. Borrowing levels remain persistently high. In April, government borrowing rose by £23bn, and last month it rose again by £23.3bn – more than 30 per cent higher than the previous 12 months and despite huge hauls of new tax revenue.
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Meanwhile, businesses are struggling with the weight of tax rises. The CBI says that in 2025-26, businesses paid 12.7 per cent more in tax compared with the previous year, while employers’ national insurance has become the biggest single tax on companies, costing firms £123bn in 2025-26, a 28 per cent increase on the previous year.
No one is under any illusion that the next prime minister and chancellor face a difficult task. Starmer and Reeves understood the importance of a strong economic engine to pull everything along behind it, and to pay for spending plans, but still committed to higher spending and wealth redistribution long before the economy was fixed, relying instead on heavier taxation and increased borrowing. That strategy may now limit the new leader’s options – the incoming team will inherit a precarious situation where business resentment is high, and bond markets remain sensitive to signs of a more expansive economic agenda.
But Andy Burnham, the most likely successor to Starmer, has very quickly grasped that political leaders cannot easily call bond markets to heel when you are £3tn in hock to them. The more you borrow, the more it costs. The more you spend, the more nervous your lenders become. He has changed tack on issues such as relaxing the fiscal rules, Waspi compensation and wealth taxes. He may therefore adopt a more pragmatic version of the high-tax, high-spending, big-state agenda he would otherwise choose to pursue. But curbed or not, it will still have to be paid for.
There are hints of where he might look to fund his yet-to-be-revealed agenda. Spending cuts have the least appeal of all to Labour, so the money must come from either increased borrowing or taxation.
Capital Economics notes that options for loosening Labour’s fiscal rules – which aim to eventually match day-to-day spending with tax revenues, and to reduce net financial debt over the parliament – could include changing the calculation, lengthening the target horizon or creating special carve-outs such as for defence. But it warns that market perceptions and the political cost of keeping inflation and interest rates higher would still act as constraints.
Burnham believes Starmer’s administration was wrong to increase the national insurance burden on small businesses, and has indicated that he would introduce a special rate of tax for the under-pressure pubs sector. If he spares small businesses and maintains current fiscal rules, that leaves taxes on big corporations (such as banks and energy companies), capital gains, wealth and land ownership as options. He could also argue that the pledge not to increase income tax has already been broken, allowing him to increase, at the very least, the higher rates of tax, or bring back a 50p tax rate.
In our Big Read this week, Hermione Taylor and Kallum Pickering from Peel Hunt explore what a Burnham era could mean for the nation. But whatever path the next Labour leader chooses, the state of Britain’s finances is not the real problem. The most important and difficult challenge is reviving and sustaining growth – without this, the country will remain trapped in a cycle of weak productivity and rising debt. If Labour continues to prioritise redistribution at the cost of growth, Burnham will surely end up walking the same plank as his predecessors.