Andy Burnham became Britain’s Prime Minister on Monday.Toby Melville/Reuters
Mark Carney was an early backer of now former British prime minister Keir Starmer.
In a video message delivered at a 2023 Labour Party conference, the former Bank of England governor endorsed Mr. Starmer and his shadow chancellor of the exchequer, Rachel Reeves, in advance of the 2024 British election that resulted in a Labour majority.
“Rachel Reeves is a serious economist. She began her career at the Bank of England, so she understands the big picture,” Mr. Carney said then of the Labour MP, whose stint at the British central bank predated his own. “But crucially, she understands the economics of work, of place and family. And, look, it is beyond time we put her energy and ideas into action.”
If Mr. Carney seemed so enthusiastic about those ideas, it was, in part, because he helped formulate them. Indeed, he implemented some of them after becoming Canada’s Prime Minister in 2025.
Mr. Carney’s planned creation of a federal sovereign wealth fund, dubbed the Canada Strong Fund, is a near carbon copy of the National Wealth Fund that Ms. Reeves created after becoming chancellor in 2024.
Andy Burnham vows to restore stability as he becomes U.K.’s new Prime Minister
Ms. Reeves’s scheme faced similar criticisms to those levelled against Mr. Carney’s plan – notably that it does not meet the standard definition of a sovereign wealth fund, since it was created with borrowed money (rather than government budget surpluses), and thus risks crowding out private investment.
Mr. Carney’s move to split the federal budget between program and capital spending – and promise to balance program spending within three years – also mimicked Ms. Reeves’s own budgetary reforms aimed at freeing up more space for government borrowing.
Ms. Reeves ditched the traditional measure of net-debt-to-gross-domestic product in favour of a different definition of government debt – public sector net financial liabilities, or PSNFL – as her fiscal anchor. Britain’s PSNFL-to-GDP ratio is more than 10 percentage points lower than its net debt-to-GDP ratio, helping her justify increased borrowing.
In theory, anyway.
Financial markets never bought Ms. Reeves’s creative accounting. Yields on 10-year British government bonds (known as gilts) rose on her watch and, at more than 5 per cent, remain the highest in the G7.
Those hefty borrowing costs contributed to Mr. Starmer’s downfall, as bond markets grew increasingly wary of his centre-left government’s tax-and-spend policies. Fears of a debt crisis like the one that led to a 1976 bailout by the International Monetary Fund dogged Ms. Reeves during her two-year stint as chancellor.
Andy Burnham announces tax cut to energy bills in first move as U.K. prime minister
Britain’s new Labour Prime Minister, Andy Burnham, this week replaced Ms. Reeves with veteran Labour MP and former defence secretary John Healey.
Mr. Burnham has been vague about his plans. But his inaugural move to eliminate the value-added tax on electricity bills suggests he values being a popular Prime Minister more than an effective fiscal manager. He has also hinted at raising taxes on the wealthy. But the last Labour prime minister who tried that – Gordon Brown raised the top marginal income tax rate to 50 per cent from 45 per cent in 2009 – discovered the measure raised far less money than expected as wealthy residents moved or shifted income abroad.
To be fair, neither Conservative nor Labour governments have shown the will to tackle the country’s structural budget deficit, preferring to lull voters into believing there really is a free lunch. Spending on welfare, health care and pensions are squeezing everything else. The Labour Party base remains hostile to spending cuts needed to restore investor confidence.
Mr. Burnham is promising to adopt a “new economic model” to turn around Britain’s fortunes. But he faces the same “bond vigilantes” that left Ms. Reeves with so little fiscal room to manoeuvre. Mr. Starmer’s commitment to raise defence spending to 3 per cent of GDP by 2030 – which Mr. Burnham has so far not repudiated – will force Mr. Healey to make hugely unpopular spending decisions to keep the hedge funds that hold an ever-increasing share of British-government debt from ditching gilts altogether.
The good news for Mr. Carney is that Mr. Healey is reportedly more favourable than Ms. Reeves was to Britain joining the proposed Defence, Security and Resilience Bank that is being championed by Canada’s PM. But as Financial Times columnist Chris Giles warns, the DSRB is “also just government borrowing for defence spending, but with a lot of well-paid intermediaries.” Unless increased borrowing for military spending is offset by cuts elsewhere, investors will demand even higher yields on gilts, raising borrowing costs and pushing Britain closer to the brink.
This is the vicious fiscal circle in which Mr. Burnham, Britain’s seventh prime minister since 2016, finds himself. The odds are not in his favour.