The Big Economic Challenges Facing the Next Prime Minister

The United Kingdom has had six prime ministers in just ten years, and Andy Burnham looks likely to become the seventh. No matter who takes the job, they will face a long list of tough economic problems. People across the country are struggling with high prices, fewer job opportunities, and stretched public services. The public wants change, and its patience is running out.

One of the biggest challenges is following the government's spending rules. Burnham has promised to borrow money only to invest in the country, not to pay for everyday costs. He also wants to reduce the national debt over time compared to the size of the whole economy. Before a recent conflict involving the US, Israel, and Iran began, Chancellor Rachel Reeves thought the government had about £24 billion to spare — but the war may have eaten into much of that.

The government owes a lot of money, and paying interest on that debt already takes up one pound out of every ten the government spends. That means any new plans Burnham has could quickly run out of funding. He may need to raise taxes, cut spending in other areas, or find smarter ways to borrow money if he wants to move forward with his ideas.

Helping people earn more and afford a better life — known as boosting living standards — is the top priority. Between 1990 and 2007, the average person's standard of living improved by about 2.5% every year. Since then, that improvement has been cut in half, leaving households thousands of pounds worse off than they could have been. Food prices have jumped 40% in just a few years, which has made life much harder for many families.

A big reason living standards have stalled is a lack of investment. For years during the period of budget cuts known as austerity, and then after Brexit, the country did not spend enough on improving businesses and skills. The disruption caused by Covid-19 and higher energy prices made things even worse. Burnham has suggested he wants to invest more in skills and infrastructure, and even take more government control of utilities like energy and water to help lower bills.

Jobs are another major concern. Hiring is at its lowest level in five years, and young people are being hit the hardest. Companies are holding back on hiring partly because of rising wages they are required to pay, higher taxes, and the growing use of automation — machines doing work that people used to do. Sectors like retail and hospitality, which often provide first jobs for young people, have been among the worst affected.

A recent report by former Labour minister Alan Milburn warned about a growing number of young people who are not in employment, education, or training — known as NEETs. He warned that NEETs could rise to one in every six young people, which could damage their chances in life for decades to come. The second part of the report, which will include recommendations for fixing the problem, is expected later this year. It is expected to call for big changes in how schools, hospitals, and welfare services work with businesses.

Defence spending is another cost that adds pressure. The government has pledged to spend 3.5% of the country's total economic output on defence by 2035. Burnham has said he supports this goal, but reaching it could cost tens of billions of pounds. Former Defence Secretary John Healey resigned over what he called the Treasury's refusal to provide the money needed to keep the country safe.

Welfare — meaning government payments to people who are sick, elderly, or out of work — is also set to rise sharply. Spending on welfare is expected to grow by more than a quarter between 2025 and 2030. The state pension alone, which goes up every year under a system called the triple lock, could double in cost over the next 50 years. Some economists, including one of Burnham's own advisers, think the formula should be simplified to save money — but cutting pension increases would anger older voters, who are the most likely group to vote.

Housing is a problem that affects millions of people, especially younger generations. While house prices have been rising more slowly than wages recently, it is still very hard to buy a first home. Many young people are paying high rents, which makes it difficult to save up for a deposit. The average age of a first-time buyer has been rising steadily as a result.

The best long-term fix is to build more homes, but the government is already behind on its target of 300,000 new homes per year. Last year, the number of new homes built actually fell by 6%. Burnham wants to build more social housing — homes rented at lower prices for people who need them — but past governments have struggled to make this happen at the scale needed. Like many leaders before him, Burnham faces the difficult task of spending money to solve problems while keeping the country's finances under control.