Forget Elon Musk — here’s what’s really terrifying the UK government

LONDON — Elon Musk may be chucking near-daily hand grenades in the direction of the British government. But it’s a different kind of explosion that is keeping Keir Starmer up at night.

The United Kingdom’s prime minister and his top finance minister Rachel Reeves have faced dire economic headlines in recent days, as sterling tanked and 10-year borrowing costs hit their highest level since the 2008 financial crisis.

It’s revived fears that their nascent center-left administration — which has promised to turn around struggling public services and boost economic growth after tumult under the Conservatives — is now way off track in its driving purpose, with populists like Musk snapping at its heels.

The rising cost of borrowing reflects persistently high inflation, the potential tariffs awaiting under a Donald Trump presidency and weak U.K. growth. Other countries are also seeing their currencies fall against the dollar. Yet the U.K. is in a particularly tight spot.

If Reeves, the chancellor of the exchequer, has to spend more servicing government debt, she will have less money for Labour’s other priorities. And that risks pleasing nobody.

There could be more bad news on the way. Reeves will be nervous about gross domestic product figures due Thursday, covering November. October’s numbers weren’t great, as the U.K. economy shrank by 0.1 percent for a second consecutive month. And there are jitters over fresh inflation figures landing Wednesday.

The situation is especially uncomfortable because Reeves has promised not to put up taxes again on a scale comparable with her most recent budget, which was greeted with trepidation by businesses. Government departments have already been asked to find significant savings for a spending review due in June — and there’s little fat to trim.

Yet economists are predicting that Reeves will opt for further spending cuts. Former Bank of England rate-setter Martin Weale said the government may have to resort to austerity measures if market sentiment does not change.

This would be nothing short of a nightmare for a Labour administration that came to power promising to steady the ship of state.

“This will make them nervous,” said Giles Wilkes, a former No. 10 and Treasury adviser under the Conservatives. “They really would not be human if they weren’t looking at [the gilt markets] and hoping that the line starts going the other way.”

Between a rock and a hard place

Ministers now face an anxious wait until March, when the independent Office for Budget Responsibility will issue its next official forecast, spelling out how much money Reeves has to play with and its future GDP predictions. 

The Treasury sought to downplay anxious commentary last week, issuing a sharp reminder that “only the OBR can accurately predict how much headroom the government has.”

Labour’s own electoral strategy has significantly raised the stakes for this event, as the party told voters it would restore stability and respect for financial institutions, even binding chancellors to the OBR in law, at the same time as vowing to pay for investment in services through growth.

Reeves has targeted growth by freeing up money for large infrastructure projects and by courting investors at home and abroad — but it’s far from certain when and if this will yield results. 

“The trouble is governments can do their best, but in the short run, they have very few opportunities to influence growth,” said Wilkes.

If the outlook remains relatively somber by March, then the government really does faces tough choices. 

As Wilkes puts it: “Cutting spending totals for two or three years’ time is probably an easier approach than announcing a tax that starts everyone howling.”

Former Cabinet Secretary Lord Gus O’Donnell told LBC things were shaping up for “a pretty brutal spending review” with “lots of departments who are upset.”

Political poison

Some observers, however, regard talk of market meltdown and looming austerity as altogether premature.

Jim O’Neill, a former Treasury minister under the Conservatives who has also advised Reeves, described the tone of last week’s media commentary as “bonkers.” 

He pointed out the cost of borrowing could drop sharply again and “you can’t run a country’s policy based on what’s happening to bond yields every week.”

Labour MPs with finance-facing roles, such as those on the Treasury and business select committees, shared similar analysis privately.

One MP with a background in economics, granted anonymity to speak candidly, said they were “not concerned” and “nothing material has changed in the last week from the U.K. side.” 

But others looking further ahead confessed to deep worry about how the government will fund its promises to repair the NHS, address major court backlogs and keep local authorities afloat. 

A Labour MP from the 2024 intake said colleagues haven’t yet fully grasped that “it’s going to make life very difficult indeed,” while a second new Labour MP described the picture as “really challenging” for fulfilling their manifesto commitments. 

Two more MPs voiced frustration that Reeves and Prime Minister Starmer had still not yet developed “a proper, positive narrative” to offset all the warnings of economic doom and gloom.

Reeves ally O’Neill argued that while 80 percent of bond turmoil is down to external factors, the remaining 20 percent is the markets signaling that they don’t have any faith in Labour’s plans to stabilize and grow the economy.

“They are going to have to be tough on spending,” he said. “Otherwise the markets are right to have doubted them.”

James Fitzgerald contributed to this report.