Andy Burnham has been warned that ‘basket case’ Britain cannot withstand any more tax hikes after a bleak two years for the economy under Labour.

The new MP for Makerfield looks set to take over as Prime Minister this summer after Keir Starmer announced his resignation on Monday.

It is feared this will herald a lurch to the left and another wave of tax hikes to fund lavish spending plans and the ballooning welfare bill.

But the tax burden is already at an all-time high following £75billion of hikes by current Chancellor Rachel Reeves since she took office less than two years ago.

This has hammered businesses and households and left the economy floundering with a ‘lost generation’ of youngsters struggling to find work facing a lifetime on benefits.

Mohit Kumar, an economist at investment bank Jefferies, said: ‘It is not obvious where the money for any additional spending will come from. Taxes have reached a stage where further rise in taxes would be counterproductive.’

The bond markets are on high alert for any sign that a Burnham government would loosen the purse strings.

Gilt yields seesawed on Monday before edging lower on hopes a prolonged leadership contest – and the uncertainty that would bring – can be avoided. The pound also crawled higher against the dollar but fell against the euro.

But at close to 4.8 per cent, the yield on the UK’s ten-year gilts are the highest in the G7 and among the highest in the developed world.

Mike Bell, head of market strategy at RBC Bluebay, said: ‘It wouldn’t be surprising at all if we saw ten-year gilt yields trade back up to 5 per cent with the market starting to question the credibility of Burnham and the fiscal trajectory for the UK.’

Matthew Ryan, head of market strategy at Ebury, added: ‘Sterling and gilts are holding up for now, but we view this as an unambiguously negative development for UK assets.

‘Burnham sits firmly to the left of the Labour Party, and his record as mayor points to a significant step-up in public spending, a higher tax burden and greater gilt issuance. This is an experiment that the UK can ill-afford.

‘The critical near-term question is who becomes Chancellor. Any indication that a new Chancellor intends to loosen or abandon the existing fiscal rules could trigger fresh selling in UK assets.’

Higher bond yields would push up the cost of borrowing for the government, businesses and households – as was the case after the Liz Truss mini-Budget in 2022.

Adam French, head of consumer finance at Moneyfactscompare.co.uk, said: ‘Episodes of political volatility tend to push up borrowing costs as investors demand a greater premium for perceived risk.

‘The lessons of the 2022 mini-Budget remain fresh. Fiscal headroom is tight and money markets will be watching the UK closely.

‘If plans don’t add up, the subsequent loss of confidence can quickly drive up borrowing costs. Once again, it is households which risk picking up the tab if market confidence is undermined.’

Rain Newton-Smith, chief executive of the Confederation of British Industry, said business needs ‘stability, confidence and a clear path to growth’.

Neil Carberry, boss of the Recruitment and Employment Confederation, urged whoever takes over from Starmer to back business ‘rather than imposing solutions that sound good to Westminster think-tanks and more radical union leaders’.

He added: ‘What firms really need is a government that will back them to deliver growth, rather than making trading more difficult by heaping up ever more regulatory and taxation costs.’

Scott Dawson, chief executive of payments firm Decta, said: ‘The resignation of Keir Starmer underlines what the UK’s business community has been saying for some time – the country needs stability, and a major part of that comes from having a steady hand at the rudder.

'We don’t have that and the world knows it – six Prime Ministers, soon to be seven, in the past ten years doesn’t show the kind of stability that overseas investors need.

‘That perception filters down into a general view that the UK is a basket case in general.’