How will the markets react if Burham becomes Prime Minister?

 It's beginning to look like Burham will be crowned as Prime Minster with little opposition.

We don't know much about him but it's looking like he will be far more left wing than Starmer.

It looks like his policies will be 

1/ Greater public ownership / control of utilities (especially water and energy)

2/ Large-scale public investment in infrastructure and housing

He has backed spending £40 Billion on council housing. Is supportive on rent controls.  He wants to reduce bus fare caps back to £2 from £3.

So let's look at these.

Taking water into public ownership depends on the approach.   The lower end cost to the tax payer would be £60 Billion but is likely to result in legal battles.  A less confrontational  approach would cost in the region of £150 Billion.   Big sums to pay out for a capital intensive low margin business. It's hard to see what we would gain. At least with private ownership you can fine them for pollution breaches.

What about energy?  Well to nationalise all of it is likely to be of the order or £500 Billion.

 Re-nationalising the grid is probably more like £100 Billion.

These are big ticket items.

Reducing the bus fare from £3 to £2 is a much more modest £3 Billion per year. 

So what about £40 Billion on council housing?  Well the current Labour plan needs at least £240 Billion to achieve 1.5 Million homes.   So £40 Billion won't go far. It might build 160k new homes.  However council rents are not enough to service the debt to build these houses. Tax payers effectively subsidise council and social housing and that's before Universal Credit is factored in.  Rental income is less than the cost to service the capital employed....  Break-even is around 70 years assuming rents increase with inflation and the debt doesn't increase. 

The 160k new homes is not enough given the level of immigration. Net migration is currently +171k per year and with an average of 2.36 people per household these new homes will be full within a little over 2 years.  Also we should be giving council homes to struggling British citizens (actually key workers should have priority) and not to immigrants. The problems is not really building new homes - it's stricter controls on immigration since immigration places demands on our scarce housing supply. In addition to ensuring immigrants earn enough money, the government needs to make it a condition of entry that they have secured housing at market rates before they arrive.

However landlords are already fleeing the market, rents are increasing as a result as there's less supply -  so making it worse with rent control is likely to lead to large scale homeless as private landlords exit the market. Immigrants are more likely to be renting than buying so the housing shortage will get worse.

So Andy looks like he's going to dramatically increase public borrowing.  The problem is however Rachel has beat him to it.  The debt pile is now a colossal £3 TRILLION and she is borrowing money each month just to pay the interest on the debt.  There simply isn't enough tax income to spend more.  We really need a massive austerity programme slashing government by about 20% - not increasing government debt from £3 Trillion to £4 Trillion.

Andy is a nice chap and wants to be seen as a nice guy so he's not about to slash public spending. He seems to like splashing the cash to win friends.  He's going to dig a bigger hole. Sadly gilt yields (or should that be guilt guilds) and the cost of government borrowing do more to determine the cost of living crisis than Andy realises. 

His key mantra is he gives us "hope". Is that hope because Starmer and Labour were hopeless? His advisers tell him he can increase borrowing for growth.  Borrowing to buy failing companies like Thames Water will not yield growth. The only way would be for Thames Water to reduce costs (pay down it's huge debt) or increase prices. Labour's track record of reducing costs or paying down debt is pretty much non-existant so it means prices will rise which comes back to cost of living.  "Investments" like HS2 have been a disaster.  The original business case made no sense and it is now scaled back and 10x more expensive than the original plan.  Investing in nuclear power I would view as a good idea but Government needs to get out of the way and allow either China, Korea or Rolls Royce to build the nuclear power stations without the 10x bloated price tag of Sizewell. 

Pretty much every single infrastructure project is massively over budget with bloated environmental impact costs. For example just the planning document for the lower Thames crossing cost more than the 15.2-mile Lærdal Tunnel tunnel built in Norway.   I'm not sure Labour know but Isambard Kingdom Brunel is dead so the real genius of UK infrastructure delivery can no longer help....

Generally government is pretty appalling at selecting winners and growing the economy - the best thing government can do it create an environment for growth rather than being venture capital / private equity companies to pick the winners for growth.

So borrowing looks set to massively increase when we are unable to even service the debt we have. Borrowing money to place a bet on England winning the world cup or the horse to win the 4.15 at Kempton makes more sense than borrowing money to invest in infrastructure to grow the economy....

The problem is the bond market is already nervous about the size of the UK debt.  We have the highest debt service cost to GDP ratio  of any country in the world.  OK France and Japan have  bigger debt but their costs to service are far lower than ours.  They are lower risk.  So splashing the cash will make the bond markets more nervous which will increase the cost to service the debt we already have.  We will all suffer as a result.

Hopefully Burnham is not as stupid as I think he is....