Key Takeaways
- Bond yields are rising to multidecade highs, reflecting concerns that Rachel Reeves’ “fiscal rules” will be broken under a new prime minister or chancellor.
- The Labour government has already set in motion tax rises over multiple years, with pension and property taxes due for increases in 2027 and 2028.
- A new government is expected to launch a budget laying out its fiscal plans, following statements on tax and spending in November 2025 and March 2026.
With Sir Keir Starmer under pressure to resign as prime minister and political rivals waiting in the wings, experts anticipate a possible successor will lurch to the political left, bringing possible increases to taxes, public spending and government borrowing.
The tax burden on workers is already the highest since the Second World War and will rise further in the coming years, while 30-year bond yields have hit a level last seen since 1998. Anxiety is rising among taxpayers and bond markets—which react closely to Labour government moves—about the fiscal plans of the next prime minister, who would be the sixth since the UK voted to leave the European Union in 2026. UK banking stocks also fell, registering investor concerns over a levy on profits or increases to corporation tax.
Government bond yields are already reflecting renewed concerns over changes to the UK’s “non-negotiable” fiscal rules amid the latest political drama in Westminster. Rising gilt yields increase government borrowing costs—which are already above £100 billion a year—at a time when public finances are already under strain. They also put upward pressure on fixed-rate mortgages in a year when the Bank of England is expected to increase interest rates, raising costs for homebuyers.
These fiscal rules dictate that government budgets must be in balance or surplus by 2029/30, at which point the Treasury should only borrow to invest. A second rule means net financial debt should fall as a share of the economy by 2029/30.
Labour Succession Battle: Why Investors Are Paying Attention
“If a leadership contest were eventually to emerge, and a more left-leaning Labour figure were to replace Starmer, market concerns would likely focus on fiscal discipline,” says Gabriele Foà, global credit portfolio manager at Algebris Investments.
“In particular, investors would question whether the fiscal rules would still be respected, with risks of higher borrowing and weaker fiscal credibility rising.”
Manchester mayor and former health secretary Andy Burnham is the clear favorite to succeed Keir Starmer in the event of a leadership election, according to a website that collates bookmakers’ odds, with current health secretary Wes Streeting second, ahead of former deputy prime minister Angela Rayner in third place.
Despite market nerves over who the next chancellor might be, bookmakers put Pat McFadden, the work and pensions secretary and Starmer ally, as the clear favorite to succeed Rachel Reeves at the Treasury.
Bond investors in particular are paying close attention to the situation after one backer of Andy Burnham, Labour MP Paula Barker, said in an interview that markets would have to “fall in line” in the event of a different legislative and fiscal agenda. She added that investors’ view of the UK would improve if they could see a prime minister pursuing “progressive policies that do speak to our communities.”
UK Tax Policy Outlook: What a New Prime Minister Could Change
The 677 days of Labour’s current tenure in power have been marked by a number of significant increases to taxation—raising taxes to their highest level ever as a share of gross domestic product. This has not been without controversy, with the party facing early criticism in November 2024 for its plans to remove the exemption from inheritance tax for farms valued at £1 million or more. Other tax increases—including VAT on private school fees and an increase to employer National Insurance contributions—have added to the political pressure on the government to both balance the books and promote growth in the UK’s lagging economy. It’s widely believed the latter change to National Insurance resulted in many employers canceling hiring and capital investment plans.
Some key changes to taxation have yet to kick in: Private pensions and death benefits come into “scope” for inheritance tax from April 2027. ISA allowances will also fall in 2027 for cash savings. Changes to property taxation, dubbed the “mansion tax” and targeting high-end homes above £2 million, will take effect in April 2028.
Will an Emergency UK Budget Follow a Change in Leadership?
In the event of a change in government, it’s highly likely that there would be another government budget, and that the priorities of left-leaning Labour MPs would be reflected at the despatch box.
“Faced with hordes of Labour MPs worried about their reelection chances as Reform surges, a new PM will find it very hard to resist calls to spend more money in order to shore up their embattled party,” says Chris Beauchamp, chief UK market analyst at the trading platform IG.
In January, seven Labour MPs in the 60-year-old “Tribune” political faction of the Labour Party, wrote that the party’s power should be used to “build an economy fit for the 21st century; one where working people are better off and wealth and power are not concentrated in the hands of the privileged few.” A pamphlet published by the broader group this week now suggests the UK’s fiscal framework is “unfit for purpose,” that there should be tax increases on the wealthy, and that the Treasury should play a less prominent role in setting the UK’s policy framework.
If such ideas prove influential in the leadership tussle that could now follow, experts expect some dramatic market movements that belie the “fiscal discipline” previously shown by chancellor Rachel Reeves.
“A new chancellor might not have the same patience as Reeves and could rip up her playbook, bringing additional uncertainty for the markets on top of the fact a new prime minister could take the country in a different direction,” says Dan Coatsworth, head of markets at AJ Bell.
What Will an Emergency Budget Actually Look Like?
There is some precedent for “emergency budgets” in recent years. While the phrase “emergency” is not used by governments for obvious reasons, the public and investors in UK government debt expect a formal framework for short-term interventions in the economy. They are often used after periods of crisis to outline the new government’s plans.
Following the minibudget crisis in September 2022 that brought down the short-lived UK government led by Liz Truss, replacement chancellor Jeremy Hunt issued a statement to the House of Commons in October, which was then followed on Nov. 17, 2022 which shored up market confidence in the government’s fiscal position. The last full “emergency Budget” was delivered by then-chancellor George Osborne in July 2015 following an unexpected Conservative Party majority at the general election of that year.
Given the expected dramatic change in policy direction discussed by Labour rebels, it’s highly likely there would have to be some form of formal address to parliament laying out a new government’s plans.
What Happens Next for UK Interest Rates?
This would inevitably affect the Bank of England’s efforts to reduce UK inflation to its 2% annual target.
“Don’t be fooled by the Bank of England having not changed the UK base rate since December 2025,” says AJ Bell’s Coatsworth.
“Interest rate expectations move gilt yields—the more they go up, the greater the potential for the economy to slow down, and that could be the trigger for the Bank of England to react with its rate decision. In such a situation, the Bank would be expected to cut rates to stimulate consumer and business spending. However, it faces a tough call if inflation remains sticky.”
