It has been a turbulent week for the UK government, with Prime Minister Keir Starmer and his ministers under mounting scrutiny as investors question Britain’s fiscal, economic and political outlook.
A sharp sell-off in global bond markets on Tuesday pushed the yield on the UK’s 30-year gilt to levels not seen since 1998, dragging the pound lower and adding to fiscal challenges ahead of November’s Autumn Budget. The crisis was further fueled by political controversy, as Deputy Prime Minister Angela Rayner faced calls to resign after admitting to underpaying tax on a second home.
Rayner insisted she had acted on professional advice when purchasing her seaside apartment. Still, the revelations come at a time when the government is struggling to rebuild voter trust and bolster confidence among international investors.
Bond market strains and fiscal credibility concerns
Britain has not been alone in experiencing volatility, with yields rising across major economies as investors weigh stubborn inflation, widening deficits and swelling debt burdens. Yet concerns around the UK are uniquely acute.
Finance Minister Rachel Reeves faces skepticism over her ability to stabilize the nation’s finances. The UK’s budget deficit stood at 4.8% in 2024, while public debt hovered at 96% of GDP as of July. Reeves’ Autumn Budget, now scheduled for Nov. 26, will need to address these imbalances amid persistently high inflation and sluggish growth — a backdrop that complicates the Bank of England’s policy path.
As of Thursday morning, the UK’s 30-year gilt yield had eased slightly to 5.582%, though economists warn that the combination of record gilt issuance and heightened fiscal uncertainty will keep pressure elevated.
Economists warn of sticky inflation and fiscal dilemmas
Fredrik Repton, senior portfolio manager at Neuberger Berman, told CNBC that while Tuesday’s moves should not spark panic, markets are watching closely. “It’s been a record issuance of gilts this week, with syndication rising from £8 billion to £14 billion. It’s important not to overreact, but deficits and political risks are on the radar,” he said.
HSBC’s senior European economist Fabio Balboni highlighted the Bank of England’s difficult position. With inflation running at 3.8% in July — hotter than expected — he warned that the central bank may struggle to justify further rate cuts in the near term. “You have sticky inflation on one side, and on the other, very large fiscal deficits. That sets up tough decisions for the Autumn Budget,” Balboni explained.
Keep calm and carry on?
The Treasury confirmed Wednesday that Reeves will present the government’s 2026 fiscal plans on Nov. 26. Her strategy hinges on strict fiscal rules: day-to-day spending covered by taxes, with borrowing reserved only for investment. That leaves her with limited room to maneuver — potentially forcing tax hikes or welfare cuts to meet her goal of a balanced budget by the end of the decade.
Big-ticket commitments to the NHS, defense and education remain intact, but the government has already targeted businesses through higher levies, raising speculation that banks, workers and wealthier households may face further fiscal tightening.
Still, some analysts urge caution before drawing dramatic conclusions from gilt movements. Bill Blain, strategist and founder of Wind Shift Capital, noted in his Morning Porridge commentary: “You can’t analyse UK gilt risks without factoring the global picture. Rising yields reflect a broader inflation threat, compounded by high debt, refinancing risks, geopolitical uncertainty and political instability. That mix explains the fragility of market sentiment today.”
