All eyes are on John Healey, the UK's new finance minister. Here’s what’s at stake

Andy Burnham began his tenure as the U.K.'s seventh prime minister in 10 years this week — but investors' attention is now on John Healey, who was named Chancellor of the Exchequer late on Monday.

Britain's new finance minister faces a delicate balancing act between delivering Burnham's potentially more left-leaning agenda and calming financial markets.

As pressure mounted on former prime minister Keir Starmer, and Burnham, widely seen as a more left-wing candidate, emerged as the frontrunner to replace him, U.K. bond markets saw turbulent trade as investors feared the potential for a more fiscally loose approach.

Former chancellor Rachel Reeves was focused on the U.K. government's so-called fiscal rules, which are designed to rein in spending and borrowing.

In one of her final speeches as chancellor, Reeves touted her record on reducing public borrowing and stimulating economic growth.

Official statistics show that public sector net borrowing fell by one-third year-on-year in June, with tax receipts rising while expenditure fell slightly. But borrowing in the financial year to June was the 10th highest April to June period since records began in the early 1990s.

But Reeves and Starmer faced criticism for some of their fiscal policies, such as increasing National Insurance — a kind of tax on employment — for businesses, and watering down welfare reforms to appease backbench lawmakers.

And although net borrowing has fallen, the U.K. still has a debt-to-GDP ratio of around 95%.

Little is certain about Burnham's incoming policy mix.

However, he has pledged to fix the "big things," such as social care, build record numbers of public housing, and provide "breathing space" for households grappling with an ongoing cost-of-living crisis. At the same time, he has pledged to be a "pro-business" prime minister.

Burnham and Healey announced Tuesday that they would cut sales tax on household electricity bills from 5% to 0% from October, a measure that will cost £850 million in 2026-27. They said it would be funded by scrapping Starmer's Digital ID program, which was expected to cost £1.8 billion over the next three years.

"For too long, too many people have struggled with the cost of living," Healey said in a statement. "Today's energy tax cut will give families some breathing room on bills, and provide some reassurance this winter."

Further details on his flagship policies are expected to be unveiled later on Tuesday.

Healey, meanwhile, is expected to see defense spending as a priority. His appointment as Burnham's second-in-command comes just weeks after he resigned as Starmer's defense minister, citing his view that the government was "unwilling to commit the resources that the nation needs to defend the country."

Last year, Starmer vowed to drastically increase defense spending, shortly before the NATO military alliance hiked its miltary spending targets.

Bond markets have largely been supportive of Starmer and Reeves remaining in post, with U.K. government bonds, known as gilts, seeing large swings on the back of headlines calling their roles into question over the past two years. Fears Starmer would be forced out after May's local elections saw government borrowing costs spike to a post-2008 high.

Gilt yields fell across the curve on Tuesday morning, suggesting markets were calmed by Burnham's cabinet choices.

Over the past month, however, the benchmark 10-year gilt yield has risen by around 19 basis points, while the longer-term 30-year gilt yield has added around 21 basis points, with both seeing choppy trade in the interim. Recent moves can be partially attributed to the economic impact of the Iran war, which has lifted borrowing costs across most major economies, but U.K. yields continue to trade at a substantial premium to G7 peers.

Bond yields and prices move in opposite directions.

Speaking on CNBC's "Squawk Box Europe" on Tuesday, George Godber, who manages the £781 million Polar Capital UK Value Opportunities Fund, said "you can attribute quite a lot" of the recent moves in gilt markets to Burnham.

"Gilts have moved 50 basis points in the last month … that's costing the average household £80 more on a mortgage, and so [Burnham's proposed] saving on the utility bill is pretty small," he said.

"We've taken the view that Burnham's likely to be left of Starmer, and so it's going to be higher tax, lower growth, and that's tough for rate-sensitive parts of the economy," he said.

But Godber argued that, much like his predecessors, Burnham would likely have his more ambitious spending projects reined in by the bond market.

"Have a look at the intraday move in the gilt market yesterday — the moment Burnham used the words, we will be flexible on the fiscal rules, gilts [reacted], so the gilt market will control their policy," he said.

"When you're £3 trillion in debt, it is your [lenders] who dictate your policy. There may be quite a few magic money trees trying to be planted outside Number 10, but they won't get away with anything that's not funded."

U.K. 10-year gilt yield

Kate Shoesmith, director of policy and insights at the British Chambers of Commerce, told CNBC's "Squawk Box Europe" on Tuesday that "the cost stack of successive policy decisions has increased by 72%" for the average small-to-medium U.K. business.

"There are certain measures where we have to look again," she said. "The biggest cost is labor … how can we address that? Is it time to have a national insurance holiday if we want to employ more young people under the age of 25? Does that give businesses a bit of breathing space?"

She urged Burnham and Healey to reconsider various measures that had been brought in by previous governments, including those enacted in Reeves' 2024 Autumn Budget, which included a £40 billion tax raid.

 "So successive policy decisions, which of those can we change, and which new measures should we be really thinking about?" Shoesmith said.

Gareth Davies, the U.K.'s shadow minister for business and trade in the opposition Conservative party, told CNBC's "Europe Early Edition" on Tuesday morning that the new government's Autumn Budget will need to find almost £5 billion ($6.7 billion) for defense spending.

"[Reeves] did leave a £4.7 billion hole in the defense investment plan," he said. "We know that for Labour it's very difficult to find savings in, for example, welfare. So it's going to be really interesting to see how both Burnham and John Healey manage their own members of Parliament, which historically has been quite a difficult task."

In a note on Monday night, Citi's European Aerospace and Defense Analyst Charles J Armitage said Healey was likely to be well received by the market as being good for defense stocks.

But "as Chancellor, he will likely have many demands on spending, and how much he will be able to allocate [to defense] remains to be seen," Armitage added.

Some lawmakers have renewed calls for the issuance of defense bonds to fund defense spending in the wake of Healey's appointment.  

J.P. Morgan CEO Jamie Dimon also waded into the debate on U.K. politics this week. In an hour-long interview with Wilfred Frost released overnight, he said he wants Burnham to succeed — but urged the incoming chancellor to focus on building a strong economy.

"I want to see the U.K. thrive," he said. "But the U.K., like everybody else and like my own country… you need a strong economy to do that. A strong economy will benefit all of your citizens — just travel around the world and look what happens when bad policies muck up a country."

Dimon added that he thought "Rachel [Reeves] did a great job."

"The new Chancellor is going to need good policies that actually cause growth," he said. "So I'm praying that they get policy right … government after government get it wrong."