By Paul Hannon
Yields on U.K. government bonds have risen as Prime Minister Keir Starmer faces questions about his leadership amid revelations that his pick to be British ambassador to Washington was far more deeply entwined with the convicted sex offender Jeffrey Epstein than previously known.
The fall in prices of, and rise in yields on what are known as gilts since the middle of last month has ended a period of calm that followed the government's November budget, which eased concerns about the government's ability to stick to its fiscal rules.
Succession risk
The rise in yields reflects worries among investors that a successor to Starmer would place less emphasis on sticking to the self-imposed rules, which require that day-to-day spending is paid for out of tax revenues, rather than borrowing, by the fiscal year ending March 2030.
The Labour Party that Starmer leads has lost much of the support that won it a large parliamentary majority in the mid-2024 general election. Investors worry that a successor attempting to win back that support would be tempted to spend more heavily on public services than currently planned, pushing government debt higher.
The current plan
According to the U.K.'s budget watchdog, the plans announced in the budget will see the gap between what the government spends and what it raises through tax narrow to 3.5% of economic output in the next fiscal year from 4.5% in this one, and further to 3% in 2028.
That is equivalent to borrowing 112.1 billion pounds ($152.95 billion) in the fiscal year ending March 2027, down from 138.3 billion pounds this year. That would add to a debt that already totals almost 3 trillion pounds, or 91.3% of gross domestic product. The fiscal rules require that the government starts to reduce its total debt by 2030. A significant departure from that path would likely push yields higher.
Succession timeline
Even before the revelations about the extent of Labour grandee Peter Mandelson's ties to Epstein raised questions about Starmer's judgment, investors were primed for a challenge to his leadership.
The immediate threat seems to have diminished. While the head of the Scottish Labour Party, Anas Sarwar, Monday called on Starmer to step down, the prime minister got a boost after a host of his cabinet members came out in support.
But that is unlikely to end speculation about Starmer's longevity.
According to opinion polls, the prime minister is unpopular with voters, and his party seems set to lose a special election on Feb. 26 in a district it now holds. It is also expected to suffer big losses in municipal elections due May 7, and that could be the trigger for a more determined challenge.
"There is a strategic advantage for challengers to hold fire until after that event," wrote JP Morgan economist Allan Monks in a note to clients.
The tax option and the Truss warning
A new prime minister might seek to revive Labour's fortunes by spending more freely than planned in the run-up to the next general election, which is likely to be held in 2029. But that wouldn't necessarily lead to a rise in borrowing if it were accompanied by an increase in taxes.
However, the government could only generate a significant increase in revenues by raising income tax rates, something Starmer pledged not to do ahead of the 2024 election. Should Starmer be ousted, that could once again be an option.
It is unlikely that a new prime minister would abandon all restraint in search of votes. Still fresh in the memory is a 2022 crisis triggered by the then-government's surprise announcement of big tax cuts, which led to a surge in gilt yields and the hasty departure of Prime Minister Liz Truss, an event that contributed to the Conservative Party's defeat two years later.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
February 11, 2026 07:14 ET (12:14 GMT)
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