Last week, Prime Minister Andy Burnham set out his vision for the UK’s future, which would probably involve higher taxes to fund a larger, more interventionist state. However, most of his plans would not take effect until after the next general election. In the meantime, the risks of sharply higher fuel prices and another rise in government bond yields point to continued pressure on households and businesses.

Andy Burnham’s first speech to the Labour Party conference covered a lot of ground, but it contained four key takeaways for the economy.

Budget pressures leave little room for major spending commitments

Despite all the policy announcements, there was virtually nothing that would affect public borrowing in the near term or alter its longer-term trajectory. Changes to the pension triple lock will not take effect until 2030, and even then any reduction in pension spending will be recycled into higher spending on social care. There was no hint of what might be coming in the Budget.

However, with fiscal headroom having halved, taxes or short-term borrowing will still need to rise to fund any cost-of-living measures. The fiscal rules and manifesto pledges on tax rises will heavily constrain Chancellor John Healey, suggesting that the Budget will probably be a smaller affair than in recent years.

Social care reform and high spending may have to wait

Burnham rightly acknowledged that the current manifesto commitments prevent him from pursuing his ambitions for social care reform and a range of other social policies, so much of that agenda will have to wait until after the next general election.

This creates a clear dividing line between those who favour a larger state funded by higher taxes and those who want tax cuts financed by spending reductions. It also raises the question of what Burnham plans to do before the next election, fuelling speculation about an early poll.

Could closer UK-EU ties support economic growth?

The Prime Minister signalled a desire for a closer relationship with Europe. In some respects, closer ties with the EU could be positive—for example, through a youth mobility deal or the alignment of some standards to reduce red tape. These measures may benefit particular industries, such as food production, but they would be economically modest in the wider picture.

The speech also prompted debate about whether the UK might re-enter the customs union or even rejoin the EU. But it takes two to tango: the EU is unlikely to enter serious negotiations until the debate is settled in the UK. That would probably require a convincing victory in another referendum, which is unlikely anytime soon.

Pension triple lock reform could reassure UK bond markets

Reforming the pension triple lock is good economics because the previous model was unsustainable. It also sends a positive signal to bond markets that the government is prepared to take difficult political decisions to strengthen the public finances. However, the changes will not take effect until the next parliament, and the eventual savings are highly uncertain.

Why the speech does not change the near-term economic outlook

Finally, whether or not one agrees with the policies, the enthusiasm and sense of direction are a welcome change from the previous two years. Nevertheless, nothing announced last week changes our view of the economy over the next couple of years.

Meanwhile, two major issues are taking shape. The first is the soaring cost of diesel and the possibility of restrictions on US exports.

Diesel prices have breached £2 a litre, up almost 45% since February because of higher crude oil prices and shortages in refinery capacity. Diesel accounts for only 1% of the inflation basket, so the direct impact on inflation will be small. However, it is a much more significant cost for businesses. Higher diesel prices will inevitably feed through supply chains and add to inflation. I have already received my first notifications from companies about fuel surcharges, and I am sure they will not be the last.

The release of around 100 million barrels of oil and refined products from G7 stocks should help bring prices down in the short term. Wholesale diesel prices have already fallen by about 8%, and the release should reduce the risk of a US export ban. That is a major positive because the UK imports around 55% of its diesel, with roughly a third coming directly from the US. A US export ban would have caused prices to rise sharply.

The second issue is that bond yields are rising again. The yield on a 30-year gilt has moved above 6%, while the 10-year yield has breached 5.4%, its highest level since 2007. That will further erode the Chancellor’s headroom at the Budget. This is not a UK-specific problem: bond yields are rising globally. The UK still pays more to borrow than many other countries, indicating that it is viewed as a relatively risky prospect. However, the premium over US borrowing costs has narrowed to its lowest level in more than a year. Burnham therefore should not take much of the blame for the increase in borrowing costs.

France’s bond market stress offers a warning for the UK

The same cannot be said for France, where signs of stress are mounting across financial markets. The yield on French 10-year bonds is fast approaching the UK’s, despite much lower interest rates in the eurozone and the implicit backing of France’s debt by the rest of the currency union, especially Germany.

Although the recent rise in borrowing costs is not Burnham’s fault, there is a lesson here. Markets will increasingly demand a premium from countries that have not brought their fiscal problems under control. A sharp increase in borrowing at the Budget would therefore risk sending the UK down the same path as France.

The UK economy is beginning to resemble Rocky Balboa. Despite repeated—and intensifying—blows from rising inflation, elevated market interest rates and subdued wage growth, UK consumers and businesses keep getting back up off the canvas. We saw further evidence of that resilience last week, when second-quarter growth was revised up from 0.4% to 0.5%, adding to this year’s positive surprises.

Consumer spending growth has averaged 0.5% per quarter so far in 2026, compared with just 0.1% in 2025. That puts spending on track for its strongest year since 2022, when the economy was still recovering from the pandemic.

Business investment was also revised sharply higher. It is now estimated to have grown by 5.2% year on year in the second quarter, up from the previous estimate of 0.8%. Anecdotal evidence suggests that AI-related investment is contributing to this strength.

What is more, this stronger momentum appears to have continued through the third quarter. The economy grew by 0.4% in July, and business surveys suggest that solid momentum continued into September. We now expect GDP growth of 1.4% this year, up from 1.2% in 2025, despite weaker wage growth, rising inflation and higher interest rates. Consumer confidence reached a two-year high in September, while credit data suggest that households have been willing to smooth the impact of the energy shock through a little more borrowing and slightly lower saving.

Admittedly, the outlook for the coming quarters is much tougher. Energy bills will rise sharply in January, pushing inflation to a peak of 4.5%. Another tax-raising Budget could undermine sentiment, and the unemployment rate is likely to climb above 5% in the coming months. We expect these pressures to pull growth down to around 1% next year.

Even so, the UK economy has a genuinely positive story to tell. Growth has consistently beaten expectations this year and has been driven by private-sector activity rather than large increases in government spending. That suggests the economy has built genuine momentum, even in the face of the energy shock.

We expect survey data to show that higher market interest rates, diesel prices and persistent uncertainty continue to weigh on construction activity.

We expect the construction PMI to rise from 44.3 to 46 in September. However, any reading below 50 remains consistent with falling activity. The sector would therefore still be contracting, albeit more slowly than in recent months.

Indeed, construction output is already around 2.5% lower than a year ago and is likely to remain a drag on growth over the rest of 2026. Higher market interest rates and pressure on real household incomes will continue to restrain demand.

Against this weak demand backdrop, we expect the RICS house price balance to fall from -28% to -30%. That would be consistent with annual growth in the official ONS house price index slowing from 1.5% currently to around zero by the end of the year.

Admittedly, the government’s new ‘Your First Home’ policy will subsidise demand, improving the backdrop for housebuilders and eventually supporting house prices. However, most survey responses will have been collected before the announcement, and the policy will take time to have a material impact on activity.

Overall, a range of indicators for the construction and housing sectors is likely to continue pointing to weaker activity as higher interest rates, squeezed real incomes and persistent uncertainty weigh on sentiment.

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