British borrowing costs are on the rise as speculation that Keir Starmer and Rachel Reeves could be ousted after the Budget rattle the bond markets.
As Downing Street desperately battled to shore up the Prime Minister’s position, the yield on UK gilts edged up as international investors demanded a higher rate of return for lending to the government.
A fresh jump in borrowing costs will be a headache for the Chancellor as she pieces together what looks set to be a brutal tax-raising Budget on November 26.
But fears are mounting that a backlash among Labour MPs over the Budget – which may include a manifesto-busting hike in income tax and a raid on pension savings – could see a leadership challenge.
Among those touted as a possible replacement is Health Secretary Wes Streeting with speculation in the City and Westminster that pensions minister Torsten Bell could be installed as Chancellor.
‘Markets will not like that,’ noted one City source amid fears that the replacement of Sir Keir and Ms Reeves will herald an even more left-wing government – leading to yet higher spending paid for by more borrowing and further tax hikes.
Sir Keir Starmer and Rachel Reeves are facing a backlash over the Budget
Sir Keir is said to have told ministers that any attempted coup would destabilise financial markets with allies pointing to the surge in borrowing costs as speculation mounted over the future of Ms Reeves earlier this year.
With growing political uncertainty prompting investors to sell UK government debt, the yield on ten-year gilts rose from below 4.39 per cent to close to 4.43 per cent while the yield on 30-year gilts reached 5.22 per cent.
Such is the level of concern over the UK economy and government debt, and Labour’s ability to rein in borrowing, that Britain faces the highest bond yields of any G7 country.
That means it is more expensive for the UK government to borrow than it is for those of the United States, Canada, Germany, France, Italy and Japan.
Neil Wilson, UK investor strategist at Saxo Markets, said the latest rise on gilt yields ‘points to the very real risk that the Budget leads to unrest within the parliamentary Labour party, a big market reaction, and the fall of Starmer and Reeves’.
He added: ‘Markets won’t care that fiscal headroom is being built by tax hikes if the Chancellor and PM cannot survive. Instability with the politics means fiscal instability, which means market instability.
He said financial markets may ‘bake in a premium for an even more left-leaning, tax-and-spend government’, adding: ‘We are heading to a fiscal showdown and political crisis that will show up in volatility in gilts and sterling – potentially a serious wobble in the pound if gilts run. The key risk is that if Reeves and or Starmer go then their fiscal rules which have underpinned an easing in gilt yields, would be in serious doubt.’
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