Chancellor Rachel Reeves recently faced a moment of public pressure—not only from restless Labour backbenchers but also from global bond markets reacting to her fiscal policies. The UK’s government bond yields spiked sharply during parliamentary tension, underlining that financiers hold serious sway over fiscal decisions.
This investor unease mirrored what’s happening in the US. Donald Trump’s recently passed “One Big Beautiful Bill”—a vast tax and spending package—is expected to add a staggering $3.3 trillion to America’s national debt. While markets have rattled, many are skeptical about how well they’ll absorb this surge in borrowing.
Why the alarm bells are ringing
Soaring UK debt and interest costs: Public debt is nearing 90% of GDP, and interest payments topped £100 billion last year—equivalent to around 8% of public spending.
Fickle market sentiment: The swift rise in government bond yields on Wednesday (and their partial retreat after Starmer’s reassurance) shows how charged investors are—and how much short-term politics can shake them.
The Truss effect: Memories of the 2022 “mini-budget” crash still loom large. Markets remain vigilant, ready to react strongly to signs of fiscal mismanagement.
What Reeves is doing—and why it matters
Reeves has emphasised that her fiscal discipline isn’t ideological but forced on her by economic reality: the higher the debt and interest rates, the less wiggle room the Treasury has. Her focus remains:
1. Adhering to tight fiscal rules, to prevent a loss of investor confidence.
2. Avoiding dramatic tax hikes or deep spending cuts, at least for now, as she seeks a balance between economic growth and fiscal stability.
3. Planning cautiously for her autumn budget, where she’ll need to appease both nervous MPs and demanding bond markets.
Looking ahead: the tightrope in autumn
Reeves faces a formidable challenge this autumn:
Labour pressure: Backbenchers, especially after unpopular welfare reforms, want more investment and less austerity. Reeves may lose political goodwill if she doesn’t deliver.
Market pressure: Investors have limited tolerance for fiscal slippage—bond yields rising further could spike government borrowing costs.
Global uncertainty: Economic tremors from Trump-era tariffs could hit UK growth and debt servicing ability.
Bottom line: Reeves must perform a delicate balancing act—maintaining fiscal discipline to satisfy investors while offering enough relief to placate her party and support growth. With debt near record highs and borrowing costs soaring, missteps could hurt both the UK’s economy and her standing—politically and financially.
