Financial markets proved relatively resilient on the arrival of a new UK Prime Minister in this week. Yesterday, gilt yields were down a touch and sterling held steady. Andy Burnham is the seventh occupant of the office since David Cameron, an unenviable period of political drama.

There is a cautious mood among wealth and investment managers about what new UK Prime Minister Andy Burnham and his colleagues might do on the economy – and how much freedom of action they have.

Burnham, who was elected in a by-election to the North West constituency of Makerfield in June, and whose return to parliament saw him replace an increasingly forlorn and unpopular Sir Keir Starmer, has made tackling rising costs of living a theme in his early pronouncements.

The new premier also chose John Healey – who resigned as Secretary of State for Defence in June – as Chancellor of the Exchequer, aka finance minister. (Burnham removed Rachel Reeves from the post.) Healey had made a point about the need for credible increases in defence spending a reason for standing down, so his appointment to the Treasury will be seen as a sign that the new administration will want to increase defence spending. A question for bond markets is how will the UK afford higher spending on such areas without either hiking taxes and/or cutting spending in areas such as welfare – not an easy choice for a centre-left government. 

Among early signs of what his government will do, Burnham is to scrap VAT on household electricity bills from October. 

With his denunciations of "neoliberalism" and the privatisation of utilities back in the 1980s, it is expected that Burnham will increase state control over utilities. 

Meanwhile, the decision to appoint Healey as Chancellor was cautiously welcomed by investors – he is seen as a relatively "safe pair of hands" in financial terms. Prior to defence, Healey had been a Treasury minister in the Blair government. Speculation over possible increases to capital gains tax and the top rate of income tax is also set to intensify, prompting investors to adjust portfolios.

In a piece of positive news for the incoming Chancellor, UK consumer price inflation dipped to 2.6 per cent in June, falling from 2.8 per cent in May, official figures showed today. Some of the decline was driven by the fall in crude oil prices in June after the US-Iran ceasefire agreement. However, tensions in the Gulf remain and prices have crept upwards since. Brent crude oil  is trading at $84.92 per barrel as of 09:20 British Summer Time, up 4.83 per cent over the past five trading days. Year to date, it is up 41 per cent.

Here are some reactions from investment managers to the developments in the UK government.

Emma Moriarty, portfolio manager, CG Asset Management
“The new PM is walking a fine line. Some of the recent budgets, from Rachel Reeves and [Tory predecessor Jeremy] Hunt, showed that meeting fiscal rules is necessary but not sufficient for gilt markets. At the moment, there's so much scrutiny of the new PM's fiscal plans, that meeting the rules technically (by borrowing through entities that fall outside the fiscal rules) but not in spirit isn't going to fool the bond market. The one thing that looks genuinely positive is the PM's expressed desire to get the welfare bill down. It's a major political issue but also an increasing fiscal burden. Any effort to get the UK out of being 'in hock' to the bond markets has to include material cuts to spending, so it's good to see that this is being considered too.”

Susannah Streeter, chief investment strategist, Wealth Club
“There has been a cautious welcome from markets to John Healey's appointment as Chancellor, taking control of the UK's fragile finances. Former defence secretary John Healey was a Treasury minister in Gordon Brown's government, and there is an expectation that he'll very much be playing second fiddle to Andy Burnham when it comes to leading economic policy, singing from the same song sheet on decentralisation and backing regional industrial bases. But the immediate focus will be on the military implications of his appointment. Having resigned from government over the lack of a roadmap to meet NATO commitments of defence spending reaching 3 per cent of GDP by 2030, attention will now turn to how quickly he might be able to find more funding to bolster the defence investment plan.

"Shares in military contractors BAE Systems, Rolls Royce, QinetiQ and Melrose were all higher in early trade, indicating investors expect the chancellor will be a bigger backer of defence than his predecessor. There will be cautious optimism to his appointment across the armed services. Having spent months making the case for higher military spending, Healey has a detailed understanding of the capability gaps facing the armed forces and the demands of a far more dangerous geopolitical environment. It comes at a highly timely moment, given reports of live-firing weapons exercises by a Russian warship off the Plymouth coast. The service chiefs are likely to believe they now have a Chancellor who understands their concerns more fully and may be more willing than his predecessor to set out a credible pathway towards spending 3 per cent of GDP on defence.

“However, he's also inherited responsibility for balancing the nation's books, and the question will be whether he can reconcile his long-standing support for higher military spending with the government's fiscal rules, which require debt to be falling as a share of the economy by the end of the Parliament. Finding room for defence while also funding infrastructure, social care, employment programmes and measures to boost growth could prove one of the defining challenges of his time at the Treasury.

“It also puts the question of tax rises back front and centre to fund these demanding requirements, especially with the VAT cut to energy bills, with speculation about increases in capital gains tax and further changes to the top rate of income tax likely to intensify. However, investors should resist the urge to drastically alter portfolios in an attempt to get ahead of potential tax changes. History shows us that rashly switching and ditching assets based on speculation can lead to unnecessary transaction costs, trigger premature tax liabilities and, crucially, miss out on the power of long-term compounding. Timing the market is hugely difficult, and time in the market is what counts most. Nevertheless, it may be worth trimming positions which have performed spectacularly well to lock in gains. For those looking to shelter their portfolios, it is well worth exploring government-backed, tax-efficient life rafts like Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS), and the Seed Enterprise Investment Scheme (SEIS).”

Lizzy Galbraith, senior political economist, Aberdeen Investments
“Healey’s appointment has not increased market concern about the fiscal outlook, but he raises expectations of further defence spending commitments. He resigned last month after failing to secure a commitment from the government to raise defence spending to 3 per cent of GDP by 2030.

“Initial policy announcements include the removal of VAT from energy bills from 1 October. Spending commitments will bring with them expectations of tax increases at the autumn budget. The government’s claim of the VAT announcement being cost neutral is likely [to be] true in the sense that future borrowing to pay for the government’s scrapped digital ID plan will now shift to funding the VAT cut. And further announcements are expected over the coming week, with speculation of cuts to bus and rail fares. Looking further ahead, Burnham has committed to presenting a 10-year reform programme in the autumn. The budget will cover some of his initial priorities, including welfare reform, defence investment and housing, all large areas of outlay for the government.

“Burnham has indicated that he will seek to maximise `flexibility' under the current fiscal rules, likely focusing on ensuring the capital spending rule is used to its full extent. Markets will be closely scrutinising any speculation in the run up to the autumn budget.

“Burnham has indicated cost of living will be his principal focus, but the scope of his early commitments and ambitions is broad and covers some of the most significant areas of government expenditure. Efforts to maximise capital spending under the current fiscal rules are highly likely, but tax rises at the autumn budget seem inevitable.”

Neil Wilson, investor strategist, Saxo UK
“The pound held steady along with gilts after Andy Burnham named John Healey as his chancellor, a surprise move, with his name not part of the conversation until now. His appointment is interesting since he has repeatedly called on the government to raise defence spending to 3 per cent of GDP and resigned from Keir Starmer's cabinet over this point and backed the idea of war bonds – new issuance to cover the cost of extra defence spending. After initially selling off yesterday afternoon both gilts and the pound have found some support and are a bit steadier today – but I would reiterate there is growing nervousness in markets about potential.

“As flagged, this was going to be viewed initially as good for the UK's defence sector with investors seeing a clear read across from the appointment to a higher defence budget." 

Charlotte Kennedy, chartered financial planner at Rathbones
“Andy Burnham has started his premiership with a carrot: scrapping VAT on domestic electricity bills from October. But the saving will vary from household to household, depending on factors including energy use, tariffs, property type, energy efficiency and household size. But the bigger question is what will ultimately fund the new government’s `new economic model'.

“Burnham has inherited a difficult economic backdrop: subdued growth, stubbornly high borrowing, a sizeable national debt and rising debt-servicing costs, alongside unresolved questions over how to fund higher defence spending. The arithmetic leaves limited room for manoeuvre. Higher taxes, spending cuts, more borrowing – or some combination of the three – could all be on the table.

“So, while the government may want to pursue a different economic strategy, the question is how much more pressure can be placed on the same relatively narrow group of taxpayers. The key issue is not simply whether taxes will rise, but who will ultimately be expected to pay for Burnham’s economic agenda – and whether those already carrying a disproportionate share of the burden have much more capacity left.”

Tony Whincup, head of investment specialists at TrinityBridge
“Burnham’s grand vision – still sketchy – will collide with reality as he assumes the weight of office. Whilst we don’t know much about his 10-year plan yet, markets will quickly judge whether new Chancellor Healey is considered market-friendly. Healey presents an immediate fiscal challenge because he quit as Defence Secretary after his predecessor, Rachel Reeves and failed to commit to spending fully 3 per cent of GDP on defence, equivalent to a shortfall of around £10 billion a year. Presumably, fixing this funding gap was a pre-condition of Healey accepting the job. Burnham has told reporters he will use `any flexibility' within UK fiscal rules and announced his intention to remove the 5 per cent VAT rate on energy bills, reportedly funded this year by scrapping digital ID plans. If costs mount on one side of the ledger tackling defence, homelessness, council houses, energy bills, etc., they’ll need to be offset on the other by cutting spending elsewhere or raising taxes. The next few hours and days will make Burnham’s direction of travel clearer. Tough choices are ahead in the Autumn Budget.”