Markets hit as Starmer refuses to give Reeves his full backing
UK government borrowing costs have shot up sharply after Keir Starmer’s failure to fully back his Chancellor at PMQs today left Rachel Reeves crying in the Commons.
In the wake of the government’s dramatic gutting of its welfare bill last night, and today’s speculation over Reeves’s future, the yield on 10-year UK government bonds, also known as gilts, surged to 4.7 per cent - its biggest one-day jump since October 2022, when Liz Truss occupied Number 10 Downing Street.
And, as market confidence in the government’s ability to stick to a coherent fiscal strategy wanes, the spread between UK government bonds and German Bunds has blown out to over 200 basis points, a level rarely seen in modern times while the pound has fallen by more than one per cent against the US dollar.
While the Prime Minister managed to save his welfare reform bill from defeat in the Commons last night, he did so by essentially gutting it of any measures that would have led to savings. According to the IFS, the last-minute concessions mean that the government will effectively save no money from the reforms.
This authority-crushing U-turn - which has blown a £5bn hole in the Chancellor’s plans - meant it would inevitably be a difficult PMQs for Keir Starmer.
It was a surprise, however, to see Reeves appear in public looking quite so broken.
Tory leader Kemi Badenoch accused the PM of using the Chancellor as “a human shield for his incompetence”, adding that she looked “miserable”.
She then asked him to re-commit to two of his previous promises: could he guarantee that taxes won’t rise in the Autumn? And could he confirm his previous pledge that Reeves would be in her post at the next general election?
Starmer ducked both questions.
After the PM stopped short of giving Reeves his full backing, she started crying.
As soon as the session ended, she rushed out, accompanied by her sister Ellie, a fellow government minister. As for what was upsetting her, a spokesperson for the Chancellor said: “It’s a personal matter, which — as you would expect — we are not going to get into.”
Downing Street later insisted that Reeves would remain in her post and had not offered her resignation.
We all know the reason that Starmer dodged Badenoch’s first question: because, if tax rises in the Autumn Budget weren’t already an inevitability following the government’s pensioner payment U-turn, they sure are now.
But is Reeves’s exit now inevitable too?
Michael Brown, a strategist at Pepperstone, seems to think so.
“Given [Starmer’s] pretty certain messaging previously that she’ll be around until the next election, participants are taking that as a solid sign she won’t be in the job much longer,” he told Bloomberg.
Brown added: “The calculus seems to be that Reeves is soon on her way, and that her replacement — whoever that is — will loosen the fiscal rules significantly.”
Caitlin Allen
Deputy Editor
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