Key Takeaways
- A new British leader would have limited scope to increase government borrowing due to high bond yields and market concerns over UK debt.
- Societe Generale’s UK economist, Sam Cartwright, expects any new prime minister to appoint a markets-friendly finance minister.
- The Labour Party is likely to suffer heavy losses in the May 2026 local elections, potentially leading to a leadership challenge.
- Government borrowing is currently at 4.5% of GDP, and the UK faces the highest bond yields in the G7 group of industrialized economies.
- A change in leadership is not currently a major concern for international investors, but a new leader may still have to navigate fiscal constraints.
Introduction to the Current State of British Politics
The British political landscape is currently filled with uncertainty, with speculation surrounding the future of Prime Minister Keir Starmer. Despite Starmer’s assertion that he will still be in power in a year’s time, Societe Generale’s UK economist, Sam Cartwright, believes that a leadership change is likely. This prediction is based on the Labour Party’s low opinion poll numbers and the potential for a leadership challenge, particularly after the May 2026 local elections. The party’s popularity has been waning, and it currently trails the populist Reform UK in polls, following a landslide victory in the 2024 national election.
The Constraints on Government Borrowing
One of the major concerns for any new leader would be the limited scope to increase government borrowing. The UK’s government borrowing is currently at 4.5% of GDP, and the country faces the highest bond yields in the G7 group of industrialized economies. This is a significant constraint, as it would limit the ability of a new leader to loosen the purse strings and increase spending. The bond market, rather than fiscal rules, is the primary constraint on increased borrowing, according to Cartwright. The UK’s 10-year government bond yield is trading at around 4.36%, near its lowest levels since late 2024, but still the highest in the G7. This high yield reflects the market’s concerns over UK debt, which were exacerbated by the Liz Truss debacle in 2022.
The Potential for a Leadership Challenge
The Labour Party is expected to suffer heavy losses in the May 2026 local elections, which could lead to a leadership challenge. Cartwright believes that this would be the point at which a challenge to Starmer’s leadership would become likely. If a new leader were to emerge, they may wish to increase government spending, potentially through borrowing. However, this would be constrained by the high bond yields and market concerns over UK debt. Some possible alternatives to Starmer within the Labour Party may have different priorities, but they would still have to navigate the fiscal constraints facing the country.
The Reaction of International Investors
International investors are not currently concerned about the potential for a leadership change in the UK. According to Cartwright, a change in leadership is "not really on the radar" for international investors. However, any new prime minister would still need to appoint a markets-friendly finance minister to maintain stability and confidence in the UK economy. The November budget, which included tax increases, was broadly welcomed by big investors, as it gave the finance minister more leeway to meet her fiscal targets. The focus on the United States and geopolitical events elsewhere in the world has also reduced the attention on British political risk.
The Implications for the UK Economy
The limited scope for increased government borrowing would have significant implications for the UK economy. A new leader would have to navigate the fiscal constraints facing the country, while also trying to boost economic growth and improve public services. The high bond yields and market concerns over UK debt would limit the ability of a new leader to increase spending, potentially constraining their ability to implement their policy agenda. The UK economy is already facing significant challenges, including high inflation and a slowdown in growth, and a new leader would need to find a way to address these challenges while working within the fiscal constraints.
Conclusion
In conclusion, a new British leader would face significant challenges in increasing government borrowing due to high bond yields and market concerns over UK debt. The Labour Party’s low opinion poll numbers and the potential for a leadership challenge make a change in leadership likely, but any new prime minister would still have to navigate the fiscal constraints facing the country. International investors are not currently concerned about the potential for a leadership change, but a new leader would still need to appoint a markets-friendly finance minister to maintain stability and confidence in the UK economy. The implications for the UK economy are significant, and a new leader would need to find a way to boost economic growth and improve public services while working within the fiscal constraints.
