British government bond turmoil rattled markets on Wednesday after the Labour government reversed its plan to implement welfare cuts, raising fresh concerns about the UK’s fiscal outlook.
The move wiped out billions in expected savings and drew parallels to the 2022 gilt crisis that ended Liz Truss’s brief premiership.
The sharp market reaction came as Chancellor Rachel Reeves appeared emotional during Prime Minister’s Questions. Though Downing Street later said her absence was due to a personal issue, and Prime Minister Keir Starmer reaffirmed confidence in her, speculation about her future intensified. Market confidence remained fragile, with significant moves across bonds, currency, and equities.
Bond markets react to welfare U-turn
The yield on the UK 10-year gilt surged as high as 4.681 percent during trading, marking the steepest one-day jump since the turmoil under Truss. It later eased to 4.60 percent, but investors remained unsettled. The 30-year gilt yield climbed by 17 basis points as long-term fiscal credibility came under scrutiny.
The sudden shift in policy eliminated a key source of fiscal savings, challenging the Labour government’s ability to meet its self-imposed financial rules. Reeves had relied on the proposed cuts to demonstrate discipline, but their withdrawal now leaves a significant funding gap.
Chancellor under pressure as credibility is questioned
The reversal has placed Chancellor Reeves under intense scrutiny both in the markets and within her party. Some Labour MPs had already voiced concerns over the fairness of the now-abandoned cuts, arguing they targeted vulnerable groups. Reeves had pushed for their support to help deliver her fiscal goals, but the retreat has weakened her position.
Prime Minister Starmer’s decision not to offer a direct endorsement of Reeves during Prime Minister’s Questions added to speculation. Although his office later confirmed full support, the markets had already reacted. The pound dropped nearly 1 percent against the dollar and hit a two-month low against the euro. The FTSE 250, seen as a gauge of UK economic sentiment, fell 1.3 percent, underperforming European peers.
Wider global debt fears weigh on UK outlook
The UK’s challenges come amid rising global concern over government deficits. Investors are increasingly cautious about debt sustainability, and Britain’s limited fiscal headroom, sluggish growth, and tight monetary policy make it more exposed. The Bank of England’s high interest rates continue to raise the government’s borrowing costs.
Analysts cautioned that a lot of investor confidence may continue to be eroded unless the government comes out clean on its fiscal position. Borrows limited, and spending cuts difficult politically, the government may have no other instrument but increasing taxes.
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