It’s not yet official, but the markets have already passed their verdict. Gilt yields surged again yesterday – with ten-year rates brushing 4.68% – as investors digested yet another fiscal U-turn and a visibly shaken Chancellor. The message could not be clearer: there is no plan, no discipline and no credibility left. The much vaunted £10 billion in fiscal ‘headroom’ has been squandered. Growth remains anaemic, and Britain’s mounting debt burden is once again in the crosshairs. Rachel Reeves may still occupy the Treasury – but politically, she is done.
She was appointed to bring control, to exorcise the ghosts of Liz Truss. Instead, Rachel Reeves now finds herself at the centre of a fiscal credibility crisis entirely of her own making. Her economic framework, all guardrails and slogans, but no real reform, has crumbled under the weight of political expediency. The numbers don’t lie. Debt servicing costs are spiralling. The £10bn fiscal cushion has not been lost to war or global shocks, but torched by a series of cynical political decisions: reinstating winter fuel handouts to wealthier pensioners, gutting welfare reform and dodging the hard truths on public sector inefficiency. For all the speeches and policy soundbites, Reeves never produced even a modest plan to lift productivity, unlock private sector investment or tackle the structural drag of an overstretched and unreformed state.
These were not the decisions of a serious Chancellor. They were tactical retreats – short-term concessions designed to placate a party still unwilling to confront the scale, cost and inefficiency of the British state. Reeves has shown no appetite for reforming a bloated, underperforming bureaucracy. Her reflex is always to spend. But Britain cannot spend its way to prosperity. This isn’t Keynesian stimulus – it’s political cowardice dressed as compassion.
And the bond markets have noticed. The rise in gilt yields is not a tremor; it’s a warning. Investors are signalling, with growing urgency, that they will not bankroll unsustainable political polices indefinitely. Reeves is now cornered by her own rules. Raise taxes, and she breaks Labour’s pledge to working families. Borrow more, and she breaks her fiscal rules, inviting further market punishment and a rise in already unsustainable debt costs. The best that can be said for Reeves is that the markets fear whoever replaces her will be even worse.
Debt interest is already costing the government around £110bn a year – more than the entire education budget. That figure will climb further if market confidence erodes. The spectre of fiscal dominance – the uncomfortable possibility that debt servicing begins to dictate monetary policy, forcing the Bank of England to accommodate political excess – is no longer a theoretical concern. It is fast becoming the backdrop to British economic policymaking. Reeves chose to look the other way. But the markets have a habit of enforcing discipline when ministers will not.
The political fallout is now impossible to ignore. Labour are haemorrhaging support in their traditional heartlands, Reform UK are surging ahead in swathes of Red Wall territory and Keir Starmer’s personal approval ratings are plunging – now among the lowest ever recorded for a first-year Prime Minister. The idea that Rachel Reeves can survive this environment, let alone deliver a politically tolerable Autumn Budget, is a fantasy sustained only by the most optimistic corners of Labour HQ.
No. 10 still insists the Prime Minister has ‘full confidence’ in his Chancellor. But we know what that means. In Westminster, such phrases are not reassurances – they are preludes. A growing number of politicians and market commentators now accept Reeves is on her way out. The only real question is whether Starmer moves before the Autumn Budget or lets her take the fall for it.
That is the Prime Minister’s dilemma. Remove Reeves now, and her successor is likely to be a more left-leaning figure, unbound by the pretence of fiscal restraint. Markets, already jittery, could take fright. Sterling would collapse. Gilt yields could spike. But keep her in place, and she must deliver a Budget that breaks Labour’s central pledge: no tax rises for working people.
That promise is already unravelling. Reeves has run out of room. National Insurance, VAT and income tax are all back on the table. Starmer may have repeated his commitment at PMQs not to raise taxes for ‘working people’ – but surely, he knows what’s coming. The question is no longer whether to raise taxes. It’s how many, how much and how quickly. Even so-called ‘temporary’ windfall levies may quietly become permanent fixtures of Labour’s fiscal toolkit.
This is the endgame Labour never prepared for. Reeves believed she could win credibility through tone alone. But tone is not policy. Style is not substance. She mistook technocracy for strategy, and the result is a mess. There is little serious supply-side reform. No credible growth plan. Just an ever-expanding state, an ever-rising bill and now, a reckoning.
For Starmer, the logic of delay is clear. Let Reeves deliver the pain, then remove her. Blame global instability. Reshuffle in January. Pretend it’s a reset. But the truth is simpler: Labour have run out of narratives. The slogans no longer match the spreadsheets.
The problem is not that Reeves is uniquely incompetent. She isn’t. The problem is that Labour’s entire economic strategy was a mirage, a carefully choreographed illusion of stability that collapsed in contact with reality. Now it is unravelling in real time.
And Starmer? He cannot escape the fallout. Whether Reeves is sacked before or after the Budget, it will be under a Prime Minister who pledged not to raise taxes on ordinary people – and who now must oversee exactly that.
The age of cost-free politics is over. The reckoning has arrived. And despite all the promises, it will be Labour that delivers it.
Reeves is finished. Starmer is exposed. And both voters – and markets – are watching.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.
