UK Chancellor Rachel Reeves declared a year ago: "We won't need budgets like this anymore," insisting her initial fiscal measures had stabilized public finances without requiring further tax increases. However, as Reeves prepares to deliver her second annual budget this Wednesday, analysts anticipate she'll unveil significant new tax hikes—a move that will test both the Labour government's credibility and the patience of jittery bond markets.
Reeves' first 18 months overseeing the world's sixth-largest economy have proven turbulent. The former Bank of England economist and Britain's first female chancellor positioned herself as the antidote to years of political chaos. Yet weeks of mixed signals on taxation from Reeves and Prime Minister Keir Starmer have eroded investor and voter confidence, putting both their political futures at stake. A YouGov poll shows only 9% of Britons approve of Reeves' performance, while 61% disapprove.
The chess champion-turned-politician now attempts what players call a "swindle"—turning disadvantage into stalemate or victory. This requires convincing financial markets of her fiscal roadmap while persuading restless Labour colleagues she hasn't squandered last year's electoral mandate to improve public services and spur growth.
Reeves champions "securonomics," emphasizing preparedness for economic shocks. But she recently blamed Trump-era tariffs and global conflicts for depleting her limited fiscal buffers. One anonymous Labour MP conceded Reeves faced unfortunate circumstances, but suggested "she might have prepared better."
Colleagues describe the chancellor as more pragmatic than her "iron-clad" fiscal rules suggest. A tearful Commons moment in July shattered her disciplined image, exposing communication failures in Starmer's government. Investors remain wary given memories of 2022's "mini-budget" crisis under former Conservative PM Liz Truss.
In early November, Reeves appeared to pave the way for income tax hikes, warning that honoring election pledges would require deep investment cuts. Markets reeled when officials abruptly reversed course, instead eyeing smaller revenue-raising measures. The policy U-turn triggered a gilt selloff, later attributed to improved economic forecasts.
Wednesday's budget may target banks, homebuilders, retailers and commercial property firms—though reports of spared banking levies recently lifted shares of Barclays (BCS.US), Lloyds (LYG.US) and NatWest (NWG.US). The sector had lobbied against further taxation, arguing UK banks already face higher burdens than European peers.
Franklin Templeton's David Zahn notes Reeves initially gained market credibility, but "that's largely evaporated." AXA Investment Managers' Nicolas Trindade warns G7 economies can't sustain such policy volatility.
Fresh data reveals UK retail confidence plunged to a 17-year low ahead of the budget, with sales declining again. While business expectations improved slightly month-on-month, quarterly confidence metrics hit lows not seen since the 2008 financial crisis.
Investors fear any successor might abandon Reeves' fiscal conservatism, potentially destabilizing Starmer's government. "Gilt markets have no tolerance for uncertainty," warns Allspring's Lauren Van Biljon. Still, UK long bonds outperform most G7 peers year-to-date, though they've lagged since Labour's July 2022 victory—trailing only Japanese debt.
Despite domestic struggles, Reeves reportedly reassured US financial leaders during recent meetings, including at the Institute of International Finance. Yet her standing with UK businesses keeps deteriorating due to last year's employer tax hikes and ongoing policy unpredictability.
The immediate threats remain the bond markets and Labour backbenchers—both could turn against Reeves if Wednesday's budget spooks investors. Starmer, who has tied his fate to his chancellor, insists their partnership remains strong: "We work together, plan together," he said in July. "We're completely aligned."