The new British Prime Minister, Andy Burnham, entered office facing an economic challenge that has long confounded successive British governments, namely how to revive an economy suffering from chronic slowdown, while easing the cost of living for citizens, and at the same time curbing the rise of public debt.

The decisions made by Burnham during his first 24 hours in office showed the delicate balance he is trying to achieve between the demands of voters and financial markets.

He surprised observers by appointing former Defense Secretary John Healey as Chancellor of the Exchequer, a move interpreted by analysts as a message to reassure investors that the government would commit to reducing public debt.

He also announced on Tuesday the cancellation of the tax on household electricity consumption for at least six months starting from October, which would save the average British family about £45 ($60) per year, according to the Associated Press.

The government confirmed that the cost of the decision would be financed by scrapping a plan to launch a digital identity system, in an attempt to avoid market fears of increased spending without clear funding sources.

Victoria Scholar, head of investment at Interactive Investor, said: 'Healey faces an arduous task; the government has ambitious plans to address the cost of living crisis, but it faces difficult public finances that make implementing these plans costly.'

Chronic challenges

Burnham faces the same problem that all British prime ministers have faced since the global financial crisis in 2008, as the average growth of the British economy has not exceeded 1.5 percent annually since 2009, compared with about 3 percent in the 15 years before the crisis.

The prime minister received a positive boost after inflation fell to 2.6 percent in June, the lowest level in 15 months, compared with 2.8 percent in May, supported by lower food and fuel prices.

But experts warned that this improvement may be temporary, with the ongoing war in the Middle East continuing to pressure energy prices.

Burnham speaking during a cabinet meeting at Downing Street in London on July 21 (AFP)

Debt and spending pressures

As Burnham seeks to revive the economy, his ability to increase spending remains constrained by his pledges to reduce public debt, which has exceeded 95 percent of GDP.

According to the British budget watchdog, debt interest payments amounted to £111.2 billion ($149 billion) in the fiscal year ending in April, equivalent to 8.3 percent of total government spending, which reduces the resources available for sectors such as health, education, and defense.

At the same time, Burnham faces a new commitment to raise defense spending to 3.5 percent of GDP by 2035, in response to US pressures to enhance European allies' contributions to defense. The Institute for Fiscal Studies estimates that implementing this commitment will cost about £36 billion annually, equivalent to about £500 per person in the UK.

Olivia O'Sullivan, researcher at Chatham House, said: 'These constraints are structural in nature, and would have posed a challenge to any prime minister at this stage.'

Growth... the key to the solution

Economists believe that achieving stronger economic growth is the only way to finance public spending without resorting to tax increases or cutting spending on public services, as growth automatically increases tax revenues through higher corporate profits, wages, and economic activity.

But Burnham has not yet provided many details about his economic plan, merely pledging to reindustrialize by directing investments to areas outside London that have been affected by industrial decline, increase public housing construction to address the housing crisis, and support small and medium enterprises that provide about 60 percent of private sector jobs.

In contrast, he pledged not to increase taxes on workers, and to maintain the 'triple lock' system for pensions, which guarantees annual increases in pensions according to the highest rate among inflation, wage growth, or 2.5 percent, which is one of the most costly government spending items.

Jim O'Neill, former chief economist at Goldman Sachs and member of the British House of Lords, said the new prime minister needs to make bolder decisions, adding: 'He must be realistic, and present different and courageous steps to address issues such as spending on social care, health services, and the pension system.'

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