What is Andy Burnham's big economic dilemma - and what choices does he have? | BBC Newscast

The podcast episode of Newscast delves into two significant pressures facing UK politics: the bond markets and the increasing demand for defense spending, alongside a separate segment on the experience of riding in a driverless taxi in London. The discussion on the bond markets begins with an explanation of how governments borrow money through debt. It highlights that this borrowing is becoming more expensive due to rising interest rates. Fisel explains that this isn't necessarily "chaos" but an "orderly repricing upwards" in reaction to increased borrowing and a multitude of global risks. He points to several factors influencing this: competition for cash from big tech firms, and the changing economic landscape in Japan. Japan, despite having the world's largest debt burden as a percentage of its economy, is also a major holder of US Treasury bonds. Recent changes in Japan's near-zero interest rates have led to increased yields on its debt, creating a ripple effect globally. Helen Miller from the Institute for Fiscal Studies (IFS) adds that while global factors are pushing up interest rates worldwide, there are also UK-specific concerns. Investors are skeptical about the credibility of the UK government's plans to quickly reduce borrowing. The government faces the challenge of ambitious spending goals, such as increasing defense spending, while maintaining tight overall spending plans. This history of not meeting borrowing reduction targets leads investors to demand higher interest rates. Regarding the upcoming budget, Miller explains that rising bond yields will reduce the "headroom" Chancellor John Healey has against his fiscal rules. This could translate to billions of pounds that would need to be raised through taxes or cut through spending to maintain the same fiscal position. She emphasizes that this isn't just about short-term interest rate movements; interest rates were already high, with a significant portion of government spending already going towards debt interest. The current situation exacerbates these existing pressures. Fisel notes that while the world has faced significant economic shocks, the UK economy has shown resilience, with growth figures outperforming the rest of the G7 in the early part of 2026. He suggests that the government's strategy was to stimulate economic activity and overcome "doomsterism." However, recent negative economic news, particularly the rise in bond yields, undermines this narrative, presenting a challenge to the Prime Minister's efforts to project control. He anticipates that positive developments, such as peace in Iran or a change in US political actions, could lead to sharp falls in yields, but the underlying chronic issue of relying on borrowed money remains. He quantifies the increase in the 10-year yield from an assumed 4.5% in March to over 5%, representing a substantial financial impact. Miller clarifies the concept of "headroom" in fiscal rules. While it exists to absorb uncertainty, the current headroom is relatively small. If the current situation is perceived as a permanent worsening of economic conditions, the government might need to rebuild this buffer. She cautions against using this headroom for increased spending on areas like defense or social care, emphasizing that it's a buffer for hitting fiscal plans, not "free money." The conversation then shifts to defense spending, a politically pertinent issue. Tandesai, Chair of the Defence Select Committee, questions the Prime Minister on the imperative to increase defense spending to 3% of GDP by 2030, citing increased threats from Russia and a potential shift in US focus away from European security. The Prime Minister claims commitment to defense spending, but Fisel points out this commitment is to a different figure (3.5% by 2035) and that the Prime Minister was answering a different question than the one posed. The discussion highlights the difficulty in squaring ambitious defense spending with existing infrastructure plans. Jim O'Neill, a former Treasury Minister and advisor to the Prime Minister, suggests a strategy where the government demonstrates its ability to manage difficult areas like welfare spending, potentially by signaling a review of the triple lock pension guarantee. This, he argues, could provide more fiscal space for defense and infrastructure investment. Miller explains the typical budget and spending review process. She notes that while departmental spending plans are usually detailed in the spending review, an increase in defense spending to 3% of GDP would consume the entire planned increase in the size of the state, leaving no room for other departments, including the NHS, without significant tax increases or cuts elsewhere. She concludes that the government needs to decide on its spending priorities at the upcoming budget. Regarding Conservative proposals for defense funding, Miller acknowledges that it involves choices: either cutting spending in other areas of government or raising taxes. She mentions proposals to cut welfare spending, such as capping benefits for families with more than two children and reducing housing benefit, noting that the specifics would be crucial. Fisel mentions that Chancellor John Healey is planning a speech on growth, which, if successful, could ease some of these fiscal pressures by making trade-offs easier. He reflects on the rapid pace of global change, including AI development and potential stock market bubbles, questioning whether political systems can keep up. He raises concerns about the potential impact of AI on the workforce and the welfare bill, noting that serious discussions about these potential disruptions are often avoided. Miller agrees that the current period, while not without challenges, is relatively stable compared to financial crises or pandemics. She stresses the importance of getting public finances in order now to be better prepared for future, potentially more severe, events. The discussion touches on the timing of defense spending commitments, questioning whether future US administrations might alter foreign policy priorities. Fisel suggests that the need for increased defense spending is driven by Russia's actions, compounded by a changing US approach, and that a potential return to a more conventional US foreign policy could influence the situation. The episode then transitions to Zoe Kleimman's experience as the first UK journalist to ride in a driverless taxi in London. She describes the process of hailing the taxi via the Uber app, noting that it's not yet a fully autonomous experience as a safety driver is present in every vehicle. She explains that only 15 such cars are currently approved, and their availability is limited. The safety driver's role is to monitor and intervene if necessary, with their hands hovering near the steering wheel. Kleimman recounts her journey in Westminster, where the car navigated a Brexit demonstration, roadworks, and a cyclist's gestures without issue. She highlights the car's ability to process real-time data from its sensors and AI to make driving decisions. However, a minor incident occurred when the car's brakes engaged due to sudden door movement from a parked van. The safety driver intervened, and the company, Wave (the British tech provider), stated it was the driver's decision to take over. Kleimman discusses the regulatory landscape, explaining that while individual cars are licensed by the government, consent from Transport for London is required for operating a service. Currently, Uber is operating with a driver due to the absence of full driverless car approval, allowing them to offer it as a service but not as a specific booking. This has potentially frustrated competitors like Google's Waymo and Chinese tech giant Baidu, who aim for fully driverless services. Regarding wider rollout, Kleimman suggests London is a test case due to its complex environment. Future expansion to other cities will depend on both government approval of cars and local authority consent. She addresses concerns about the impact on taxi drivers, with Uber stating its intention to maintain a hybrid service offering choice. Uber's CEO predicts that in ten years, only hobbyists will drive cars. Kleimman also touches on potential risks, including the possibility of hacking and the cybersecurity vulnerabilities of connected vehicles. She notes that while these are general risks for any connected technology, they feel different when applied to driverless cars. She shares that companies like Wave have been developing this technology for years, with security being a significant consideration. She recalls a scene from the Netflix film "Leave the World Behind" depicting a traffic jam of self-driving Ubers, illustrating a potential downside. She acknowledges that there have been high-profile incidents of driverless cars malfunctioning globally, leading to services being pulled in the US. Kleimman concludes by emphasizing that while the technology might seem new, its development has been a long process of refinement. She describes the experience of sitting in a driverless car as extraordinary and strange, especially in a familiar city like London. She draws a parallel to seeing pizza delivery drones in Helsinki. She also reveals the name of the Julia Roberts film: "Leave the World Behind."