It’s been called “one of the most expensive tears in history”. It has since been suggested that Chancellor Rachel Reeves’s visible distress during Wednesday’s PMQs, when Prime Minister Keir Starmer chose not to express his full confidence in her financial stewardship, resulted from a personal episode. Nevertheless the sight unnerved bond markets. Yields spiked by nearly a fifth of a percent and the pound plunged, shedding over 1% of its value in just a matter of hours and reviving painful memories of the bond market meltdown three years ago.

Ever since the Liz Truss episode of 2022, Britain has had a touchy relationship with the bond market. When she entered office, Reeves was so determined to keep them on her side that she elevated investors to a higher rank than her own party. Constrained as she was by her own election promises not to raise most taxes while increasing spending and keeping the deficit down, her strategy to restore Britain’s economic health never looked very plausible. But while bond investors never showed much faith in her economic plan, they at least considered her a safe pair of hands.

The thought of her suddenly departing over the botched welfare reform bill shows that there’s little appetite for a new chancellor. If a distressed-looking chancellor unnerved the bond market, a sacked one could do even more damage.

It’s a difficult enough time for government bookkeepers as it is. A looming over-supply of government bonds, inflated by expansive German fiscal plans and America’s worsening deficit, make this a very competitive market. If investors have any doubt about the UK government’s seriousness with respect to its future finances, they will stop buying.

But while many are calling for Reeves to be replaced as chancellor, and though her authority has been badly weakened by this fiasco, it’s not clear that sacking her will solve the Government’s problem. It was only after Downing Street expressed its full confidence in her later on Wednesday afternoon that bonds and the pound came back off their lows. The very fact that their value plunged when the Prime Minister initially hesitated to give her his full backing reveals the problem: Reeves may not be a chancellor whom bond investors think highly of, but they like the alternatives even less. You can hardly blame them, given the ranks of the parliamentary party still include MPs who say things like: “I don’t understand why this means tax rises when it’s only a few billion pounds.” For Starmer to sack his chancellor now could cause a full-on panic.

This goes to the heart of the matter. Basing major social policy reforms on purely fiscal considerations is a bad way to do policy for any government. For a Labour government, it’s unforgiveable. However, the final decision to manage matters that way rests not with the Chancellor, but with her Prime Minister. In that sense, if Labour was being really ruthless, it might take the lesson of 2022. Then, the governing party got the bond market back on board by dumping its leader but keeping her (replacement) chancellor.

That seems unlikely for now. Instead, an unstable Starmer-Reeves duopoly may linger as a weakened leadership, wrestling with a growing restiveness on their backbenches. Getting its agenda back on track will now be a monumental task for this government. Given how badly it has managed to bungle things in its first year in office, despite having a huge majority, restoring its agenda may now seem a distant prospect.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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