Britain’s Starmer faces leadership challenge as rival Burnham becomes MP

Andy Burnham has won a special election to the British Parliament, paving the way for him to challenge Prime Minister Keir Starmer in the leadership race.

In the election in Makerfield, north-west England, Labour’s former mayor of Greater Manchester, Burnham, defeated the British Reform Party by more than 9,000 votes, winning nearly 55% of the vote.

Mr Burnham could pose a leadership challenge as early as next week if Mr Starmer is formally sworn in as an MP. He will need the support of at least 81 Labor MPs.

In his victory speech, Mr Burnham, a prominent figure on the party’s left and often referred to as Labour’s “King in the North”, described Makerfield as a “touchstone” rather than a “stepping stone” and pledged to put neglected communities at the heart of his politics.

In his victory acceptance speech, Mr. Burnham appeared to be paving the way for a leadership role.

He said the victory was “a chance to build a new politics based on unity and hope” and “turn away from the path that leads to the kind of divided and dark politics we see in the United States”, adding: “We have to get this country back on the right path.”

Peel Hunt chief economist Callum Pickering said Mr Burnham’s victory had been largely expected, but it raised some pressing questions for the market.

Importantly, markets will be watching whether Burnham’s government sticks to Labour’s existing fiscal rules and whether his policy agenda risks increasing inflationary pressures.

The announcement comes as official data shows an unexpected rise in UK public borrowing. The Office for Budget Responsibility said on Friday that Britain’s budget deficit was 23.3 billion pounds ($30.8 billion) in May, the highest level for the month in six years and significantly higher than economists’ expectations of 18.9 billion pounds.

Mr Burnham sought to appease investors last month by denying previous comments suggesting the UK was being “swayed by the bond market”.

Mr Pickering said he did not expect Mr Burnham to signal a departure from the current framework for borrowing and debt, but warned investors could still demand additional cover for inflation risks on UK government bonds.

“We expect to see some inflation premium,” Pickering told CNBC’s “Europe Early Edition” on Friday, noting the potential for pressure on both short-term and long-term Treasuries, known as Gilts.

yield of 10 years giltsThe interest rate, a benchmark for British government borrowing, rose more than eight basis points to 4.8394% on Friday. Yields on 2-year and 30-year bonds also rose.

Matthew Ryan, head of market strategy at Everly, said the market was underestimating the risk that the Burnham government would test Britain’s fiscal rules on government spending, income tax rates and borrowing.

“There’s very little fiscal space and there’s very little wiggle room for the government at this point,” he told CNBC’s Squawk Box Europe, noting that the autumn budget will be Labor’s next big test. “We see further downside for UK assets.”

Mr Pickering added: “Markets are right to focus on the relationship between bond yields and sterling. We have an unfortunately well-known situation in the UK where bad policy drives up interest rates and pushes down sterling. That’s the focus.”

The schedule of leadership challenges can also be important.

If Labor leaders conclude they no longer support Mr Starmer, an orderly transition could limit market turmoil. But Pickering said investors could be forced to wait for more clarity on tax, spending and borrowing measures if the battle between Starmer and Burnham drags on.

Mr Pickering said the bigger questions centered on who would serve as finance minister in Burnham’s cabinet and how that would ultimately shape economic policy.

“For me, the uncertainty is not what happens next at No. 10, but what happens next door at No. 11,” Mr Pickering said, referring to the traditional residence of the British Chancellor of the Exchequer.