Rachel Reeves faces significant challenges in preparing for her upcoming budget presentation on 26 November, particularly concerning government bond markets. Recent internal conflicts within the Labour Party, exacerbated by briefings from government sources, threaten to undermine her strategy in the lead-up to this critical event.
Before the emergence of a leadership challenge, the Chancellor had been laying the groundwork for a budget that is anticipated to include significant tax increases, potentially breaking previous Labour manifesto commitments. This decision is driven by Treasury officials’ belief that if Reeves can establish greater “headroom” against fiscal rules, investors may regain confidence in her commitment to addressing public finances.
The intention behind these measures is to alleviate what the Treasury refers to as the “moron risk premium” associated with UK government bonds, or gilts. This term was first noted during the tumultuous leadership of Liz Truss, when investors demanded a premium due to perceived political instability. Although Reeves and Keir Starmer have positioned themselves as advocates for fiscal accountability, the lingering effects of previous instability have not completely dissipated.
Reeves recently remarked on the elevated bond yields compared to other G7 economies, expressing her desire to realign the UK’s financial situation. Initial market reactions appeared favorable to her proposed tax hikes, as evidenced by a decline in 10-year gilt yields. However, speculation surrounding Labour leadership has since intensified, potentially altering market perceptions.
Experts indicate that upcoming budget measures may involve around £30-35 billion in tax increases and spending cuts, but political dynamics could influence investor confidence. Any indications of instability within Labour leadership are likely to unsettle bond investors, who have recently shown concern over political risks.
Market response to these developments has already been evident, with a slight increase in gilt yields following political briefings. Analysts suggest that the focus may now shift away from budget specifics to seeking stability within Labour’s leadership as the budget date approaches.
Source: https://www.theguardian.com/business/2025/nov/12/labour-infighting-rachel-reeves-budget-government-bond-markets