LONDON – UK financial markets plunged on Wednesday as a teary Rachel Reeves faced the House of Commons, sparking a £3 billion sell-off and fuelling doubts about Labour’s economic policies and Sir Keir Starmer’s control over his party.
Reeves, who struggled to hold back tears during Prime Minister’s Questions, found herself under intense scrutiny following a sudden reversal on welfare cuts that created a new £5 billion gap in her budget. This move has amplified worries about mounting government debt and the UK’s economic outlook.
The dramatic Commons session unfolded when Conservative leader Kemi Badenoch put Starmer on the spot about Reeves’ future as Chancellor. Starmer dodged directly supporting Reeves, instead taking a swipe at Badenoch’s position, which raised eyebrows both inside and outside Parliament.
“She’s pointing at me and looks absolutely miserable,” Badenoch remarked as Reeves wiped tears from her face on the front bench. Body language specialist Judi James described Reeves as “utterly crushed”, pointing to her slumped shoulders and strained expression as signs of the pressure she faces.
Risk of Political Upheaval
Investors reacted quickly. Yields on ten-year UK government bonds jumped to 4.6 per cent, while sterling slid by 1 per cent against the dollar to below $1.36. Analysts pinned the sharp sell-off on fears over Labour’s ability to manage public finances and the risk of political upheaval. Neil Wilson, a market strategist, said, “The market is acting as a vigilante, making clear it has lost faith.”
The £3 billion fall was among the steepest since the storm caused by Liz Truss’s mini-Budget, making clear how shaky Labour’s support among investors has become.
Rachel Reeves ’ emotional response followed a tough rebellion by 49 Labour MPs, who pushed the government into scrapping key welfare changes meant to save nearly £5 billion by tightening Personal Independence Payment rules. This retreat, along with an earlier shift on winter fuel payments that cost £1.3 billion, has left Reeves with a £6 billion budget gap.
Her pledge to fund all core spending through tax revenue by 2029/30 now looks difficult to keep. Some economists warn that without either tax rises or spending cuts, Reeves may have to break her own fiscal rules, which could unsettle markets even more.
Labour’s wider economic troubles have also added to Reeves’ problems. Last year’s Autumn Budget, which put up taxes by £40 billion and cut fuel support for pensioners, drew strong criticism from both Labour MPs and the wider public.
Experts at the Institute for Fiscal Studies have warned that backing away from planned welfare changes may not only fail to save money but also add £100 million to government bills every year. Deutsche Bank suggests Reeves is still £32 billion short of her fiscal goals, raising fears of new tax hikes in the autumn Budget.
Rachel Reeves and Starmer
Downing Street tried to calm the situation, with a spokesperson saying, “The Chancellor is going nowhere. She has the Prime Minister’s full support.” Starmer later told the BBC he and Reeves “are in lockstep” and she would keep her role “for many years.” Treasury officials said Reeves’ tears were due to a personal issue, but reports of a clash with Commons Speaker Sir Lindsay Hoyle and tension with Starmer continue to circulate.
Labour’s economic reputation faces a tough road back. Comments on X showed both public and market concern, with many comparing the chaos to the Truss era. One user wrote, “This government is even more at risk of wrecking the economy than Liz Truss ever was.” An LBC poll recently found that more voters trust Reform UK leader Nigel Farage over Reeves on the economy, highlighting the scale of the challenge she faces.
Pressure is also mounting on Starmer’s leadership. The rebellion over welfare was the biggest so far under his leadership and exposed deep splits within Labour. A YouGov poll showed that 70 per cent of people think Labour is divided, with only 41 per cent backing Starmer’s move to soften welfare changes.
His refusal to firmly support Rachel Reeves at PMQs and a shaky performance at the despatch box have added to doubts about his authority. Judi James noted, “Starmer is stuck between sneers and tears,” highlighting the visible friction in the Labour front row, with Angela Rayner said to have given Reeves a withering glare during the debate.
With markets still nervous, Rachel Reeves faces a tough decision: increase taxes, cut spending elsewhere, or drop her strict borrowing rules. Kathleen Brooks at XTB warned that if the rise in bond yields continues, the UK could face “another fiscal crisis” if Labour can’t win back market confidence. For now, Starmer’s praise for Reeves may not be enough to calm nerves, as Labour continues to face both internal fights and a shaky economy.
All eyes are now on Rachel Reeves and the upcoming autumn Budget, where she must find a way to reassure the financial markets and bring her party together. After promising strict financial control, the tears she shed in Parliament may be a sign not just of personal stress but of a government struggling to keep its promises.
