Labour leadership turmoil could cost Chancellor Rachel Reeves up to £12bn, according to analysis by Wall Street bank Goldman Sachs. The warning comes as political infighting within the Labour Party threatens to destabilise bond markets and stunt economic growth, reducing the Chancellor's fiscal headroom by approximately £12bn.
Impact on Fiscal Headroom
While the £12bn hit would not entirely erase Reeves' existing £23.6bn headroom, it would significantly limit her ability to fund major initiatives such as increased defence spending or a substantial energy support package. Goldman Sachs noted that political instability raises uncertainty around fiscal tightening by the end of parliament, given concerns that a leftward shift in government could trigger a borrowing spree.
Bank of England Response
The bank suggested that looser fiscal policy would require the Bank of England to hike interest rates further, though it remains unclear how the Monetary Policy Committee would respond to a new political agenda. A note from Goldman Sachs stated: "Our markets team expects the repricing of Gilt yields to remain sticky given upside risks to inflation and the potential for fiscal deterioration from higher rates. Our strategists have argued that political risk presents asymmetric downside risks to sterling in the near-term but see this as more likely to materialise as bouts of weakness rather than a sustained trend."
Labour Figures and Fiscal Rules
The bank's warning coincided with JP Morgan chief Jamie Dimon cautioning that he could withdraw a £3bn investment project for new offices in London if a new government turned "hostile" to the banking sector. Banks have largely been wary of Westminster turmoil, fearing the Labour government might surrender to leftwing forces within the party.
Most City analysts warned that bond traders were concerned by comments from Andy Burnham and his supporters regarding fiscal stability. Paula Barker, the Labour MP for Liverpool Wavertree, stated that markets would have to "fall in line" with Burnham and that investors would view the UK as "the best place to be" if the government unveiled "progressive policies that do speak to our communities."
Burnham attempted to ease perceptions of fiscal promiscuity, assuring traders he would adhere to clear rules. Former deputy prime minister Angela Rayner also gave a scathing assessment of the Labour government's agenda, asserting that sweeping reforms could be made within the framework of current fiscal rules set by Reeves.
Budget Concerns
Last year's Budget was marred by continual speculation over tax rises and welfare spending increases. This year's Budget could leave investors worried, as economists have suggested that further weeks of disruption across the Strait of Hormuz could plunge the UK economy into a recession.
