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\t\tRachel Reeves\u2019 decisions at the Budget could send the UK economy into crisis mode.\nDarren Staples\/PA Wire<\/p>\n
\t\t\tThursday 09 October 2025 1:35 pm\n\t\t\t<\/p>\n
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\t\tRachel Reeves\u2019 decisions at the Budget could send the UK economy into crisis mode.
\nDarren Staples\/PA Wire<\/p>\n
Poor decisions made by Rachel Reeves at the next Budget could send the UK economy into a crisis if her announcements trigger a collapse in bond markets\u2019 confidence, according to a scenario played out by analysts at Oxford Economics.\u00a0<\/p>\n
Rachel Reeves<\/a> has pledged to drive growth in the UK and lower the cost of living for Brits across the country at the Budget despite projections taxes could rise by more than \u00a330bn.\u00a0<\/p>\n But in a scenario where markets losing confidence led to bond yields rocketing and the pound plummeting against the US dollar, the UK economy could be crushed by a 0.6 percentage point hit to GDP.\u00a0<\/p>\n Fresh research published by the economics consultancy is set to intensify pressure on Reeves given her decisions could hit growth and inflation.\u00a0<\/p>\n Why Rachel Reeves could spook bond markets<\/p>\n Analysts at the economics consultancy said the UK faced greater risks given traders were currently giving the government \u201cthe benefit of the doubt\u201d.\u00a0<\/p>\n Its new report said that although the UK had a lower level of gross government debt than most countries, it did not have the same \u201cstructural benefits\u201d as other economies.\u00a0<\/p>\n Japan, for example, had strong demand from savers for its government debt while the US enjoyed being the world\u2019s reserve currency, the report said, meaning more of the UK\u2019s debt was held by foreign investors.\u00a0<\/p>\n In turn, the UK was more exposed to \u201cswings in market sentiment\u201d. Next month\u2019s Budget was the \u201cobvious trigger\u201d for a loss of confidence in the UK, according to Oxford Economics \u2013 should its contents be poorly received.<\/p>\n The report set out a number of ways Reeves could spook the bond markets and give rise to an economic crisis.<\/p>\n It said that while Reeves is expected to stick to her rules to keep day-to-day government spending in balance in a three-year forecast period and to reduce a form of government debt in the same time frame, she could make tax choices that put public finances on an unstable footing.\u00a0<\/p>\n \t\t\t\t\tRead more<\/p>\n \t\t\tAutumn Budget set for 26 November as Reeves claims economy \u2018not working well\u2019<\/a><\/p>\n The Chancellor is widely expected to have to plug a fiscal hole worth around \u00a330bn at the Budget due to lower productivity forecasts, higher government debt payments caused by rising gilt yields and costs from U-turns on welfare reforms.\u00a0<\/p>\n<\/p>\n A decision to drive up government revenue from \u201ca series of smaller taxes\u201d could leave markets on edge given behavioural responses \u201cmay prove greater than expected\u201d and lobbying efforts from affected groups might further depress Labour\u2019s poll ratings.\u00a0<\/p>\n \u201cHistorically, revenue-based consolidations have a low success rate,\u201d said Andrew Goodwin, chief economist at Oxford Economics. <\/p>\n \u201cTrying to raise large amounts of extra revenue from smaller taxes may also undermine the credibility of the government\u2019s plan.\u201d<\/p>\n Moves to leave a smaller headroom than \u00a39.9bn \u2013 already the third smallest fiscal buffer left by any Chancellor in the last 15 years \u2013 and tweaks fiscal rules by reducing the number of times the Office for Budget Responsibility (OBR)<\/a> publishes forecasts in a one-year period could also frighten bond traders if the move is interpreted as a signal of the government\u2019s \u201cposition of weakness\u201d.\u00a0<\/p>\n<\/p>\n Should markets lose faith and sterling depreciates, the UK could struggle to combat high inflation.\u00a0<\/p>\n Under this scenario, Oxford Economics believes the Bank of England would keep interest rates<\/a> at four per cent for the rest of 2026 and prevent borrowing costs from dropping.\u00a0<\/p>\n In this case, GDP growth would also be 0.6 percentage points below Oxford Economics forecasts by the end of 2027.\u00a0<\/p>\n Reeves\u2019 poor decision-making would force Labour to \u201cbelatedly change\u201d its course on the UK economy and instead cut spending to restore market confidence, with all the political chaos such a move would entail.<\/p>\n \t\t\t\t\tRead more<\/p>\n