The Financial Times has reported that Shabana Mahmood, the UK Home Secretary, is expected to take on the role of Chancellor of the Exchequer in the government to be formed under Andy Burnham, the leader of the Labour Party.

The newspaper quoted three sources familiar with the incoming Prime Minister's plans, saying Burnham intends to appoint Shabana as Chancellor, but a spokesperson for him declined to comment on what he called "speculation", adding that ministerial positions would not be announced until next Monday after he becomes Prime Minister.

However, one source familiar with the plan said: "Shabana Mahmood's appointment to the post of Chancellor is settled. It is a done deal."

Another source said Mahmood will move to the Treasury, while current Energy Secretary Ed Miliband is likely to become Foreign Secretary.

One of Burnham's close associates, commenting on the possibility of Mahmood's appointment, said: "I wouldn't advise you to rule it out."

Tax rises

The new Chancellor's first task will be to draft the autumn budget, as Burnham said on Wednesday that he may "ask for a modest increase" in taxes, refusing to rule out a wealth levy.

But Burnham warned that decisions on taxes "will be tough." He added: "I won't shy away from that. As you know, we will have to work hard to ensure we can cover our spending, and that may at some point require asking for more money."

When asked about a wealth tax, he said: "I wouldn't rule anything out at this stage. I think we need more fairness."

Mahmood belongs to the right wing of the Labour Party and is considered a firm and competent minister. She oversaw controversial immigration reforms but has not previously handled an economic portfolio in government, according to the Financial Times.

Miliband, a former Treasury adviser, belongs to the moderate left of the Labour Party and has advocated for net-zero policies to tackle climate change. He is admired by some Treasury veterans for his economic expertise.

David Miliband, Ed's older brother, had been a potential candidate for Foreign Secretary in a Burnham government, according to some Labour MPs.

Associates of Shabana Mahmood confirmed that she discussed policy issues with Burnham this month, focusing mainly on domestic affairs as well as the economy.

Some trade unions and many Labour MPs believe that Miliband's relentless pursuit of net-zero is harming the economy, while business leaders and the City of London fear he will oversee more borrowing or adopt anti-business policies.

Burnham will be announced as Labour leader on Friday and will assume the role of Prime Minister next Monday, when his ministerial appointments will be officially announced.

In an interview with former football star Gary Lineker, the new Prime Minister affirmed that he is not "someone with grudges and private agendas, and will not immediately demonise a particular group."

But Burnham warned that decisions on taxes "will be tough." He added: "I won't shy away from that. As you know, we will have to work hard to ensure we can cover our spending. And that may at some point require asking for more money."

Associates of the new Prime Minister expect him to bring back Angela Rayner, the former Deputy Prime Minister, and Lucy Powell, the former Deputy Leader of the Labour Party, as well as former Health Secretary Wes Streeting and former Transport Secretary Louise Haigh.

It is also believed that Jonathan Reynolds, a senior party figure, is likely to return to his previous role as Business Secretary, while Miatta Fahnbulleh, Burnham's chief economic adviser, and Anneliese Midgley, another ally, are expected to take up ministerial positions.

Among those expected to leave the government are Business Secretary Peter Kyle, Technology Secretary Liz Kendall, Housing Secretary Steve Reed, and Attorney General Lord Richard Hermer.

Current Chancellor Rachel Reeves and Education Secretary Bridget Phillipson await their fate in the government, while former Defence Secretary John Healey may be recalled.

Investor optimism

UK government bonds outperformed their European counterparts on Wednesday as investors reacted to news of Shabana Mahmood's likely appointment to the Treasury.

The yield on 10-year bonds fell by 0.05 percentage points to 4.93%, while comparable yields on Italian debt rose by 0.03 percentage points. The pound rose by 1.1% to $1.353 as London afternoon trading came to a close.

Lee Hardman, chief currency analyst at MUFG Bank, said: "I think the market is relieved that the new finance minister does not appear to be from the left of the party."

Fund managers noted that investors are less concerned about political risks from the Labour leadership transition as clarity about the choice of finance minister increases.

Ranjeiv Mann, senior portfolio manager at Allianz Global Investors, which is betting on UK government bonds outperforming US Treasuries, said: "We need confirmation on the new administration's policy agenda, but from our perspective, we believe the focus will gradually shift towards the macroeconomy."