Burnham’s economic transformation rests on changing our fiscal and monetary framework

In the first fortnight of new Burnham-led government, the prime minister has announced a flurry of policies that will lower the cost of energy and public transport and support the hospitality sector. These will do two things: reduce the cost of living and increase spending in our economy.

If people aren’t spending money, the economy cannot thrive. But right now, consumption is forecast to grow just 0.9% in 2026 and 1.0% in 2027. With prices so much higher than they were a few years ago, households are drawing on their savings simply to hold their spending steady. Half of UK households say that if inflation picked up again, they would cut back and save. Tackling the cost of living will have beneficial knock-on effects for the rest of the economy.

But Burnham hasn’t just pledged to make life more affordable. In his first speech as prime minister, he said that his tenure would be a ​“circuit breaker” moment and would set out a 10-year plan later this year to transform the country. Quick policies to reduce costs must not come at the expense of this mission.

Burnham’s first announcement, the cut to electricity bill VAT, can be implemented quickly but will most benefit the wealthiest households who tend to use more energy. Instead, an essentials energy guarantee would give all households a block of basic, subsidised energy, and charging high-consumption households more per unit. This would cut bills by hundreds of pounds a year and focus savings on poorer households who struggle to afford their bills.

Burnham cut the bus fare cap by a third, but this only reverses the 2024 increase to £3. Bus fares should be even cheaper — £1 tickets would encourage more bus travel — and free bus travel for under-25s would make it easier for young people to travel to work, training and education.

The 20% business rates relief for pubs and clubs will give struggling venues financial relief but doesn’t solve the unfairness of small businesses paying tax based on the value of the land they occupy. Real reform would split business rates into a devolved property tax paid by businesses and a national land value tax paid by landowners. Businesses would no longer be penalised for investing in their premises and local authorities would keep far more of the tax that funds their services.

Burnham’s speech on the need to redesign our social care system showed a willingness to consider big structural reforms to the foundations of our society. But structural reforms like these require money. And under our current fiscal rules and monetary frameworks, this money is difficult for a government to access.

Luckily, there is some appetite for change in Burnham’s team. Close Burnham ally Louise Haigh MP has been arguing for better coordination between the Bank of England and the Treasury to rein in the costs that monetary policy is inflicting on government. One way of doing this is by slowing down how quickly the Bank sells off the government bonds it bought under its stimulus programme (quantitative easing). Another is to stop unnecessary payments from the Treasury to the Bank, which currently cover losses caused by higher interest payments to commercial banks, or simply to reduce those interest payments directly.

More fundamentally, better coordination between the Bank and the Treasury would mean a stronger response to future economic shocks and help bring down the UK’s stubborn inflation.

We won’t withstand the next crisis without investment in our infrastructure and public services. Lower inflation gives the Bank more room to cut interest rates, reducing borrowing costs across the economy and therefore encouraging the resilience-building investment we need. But getting inflation down should not be the sole preserve of the Bank. Cost-of-living measures from last autumn’s budget helped households while also lowering inflation, showing that targeted government policy has an important role to play. 

More of the tools at the Bank’s disposal should also be put to work building economic resilience, for example through a secondary interest rate that offers cheaper finance for green investment like home retrofits and renewables. This would cut energy bills today and reduce our exposure to the next fossil-fuel price shock. The annual remit letter from the Treasury, which sets the objectives for the Bank, is the perfect opportunity for Burnham to embed stronger coordination.

When it comes to the Treasury, fiscal policy can also be used to drive investment. Right now, the national wealth fund (NWF) is designed to reduce the risk for private companies in building infrastructure. But a proactive NWF that takes equity stakes rather than just underwriting private risk would give the public a genuine share in the infrastructure it funds, and can count as a boost to government finances, depending on the asset. There are opportunities to do this right now – for example as competitive tenders open up for new electricity transmission projects that are designed to attract exactly the kind of long-term investor the NWF could be.

But there are limits to how far we can take back public ownership within the current fiscal rules. Treating private-led ​“de-risking” as a substitute for real delivery, and hiding the state’s exposure rather than genuinely sharing it, will only get us so far. Right now, the fiscal rules themselves keep pushing our governments towards the cheapest-looking option, and we risk repeating the mistakes of the private finance initiatives of the 1990s and 2000s.

For a transformative agenda that pulls the UK out of its economic malaise, we need serious fiscal-framework reform. Burnham’s government needs to replace our rigid debt and borrowing targets with a fiscal committee empowered to judge a sustainable range for borrowing based on the state of the economy, not an arbitrary five-year snapshot. Burnham’s promised 10-year plan is the opportunity to judge fiscal sustainability over the right medium-term timeframe, strengthening the case for sustained public investment and ownership rather than short-termist penny pinching.

This fortnight’s quick relief on bills and fares show good intention. But the real test for this government will be whether those moves are a springboard for macroeconomic reform and genuine economic reset. The opportunity is there, but Burnham must be bold enough to take it.

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