Sharks surround UK Prime Minister Keir Starmer with his leadership vulnerable

British Prime Minister Keir Starmer is looking increasingly vulnerable this week as speculation grows that he could face a leadership challenge after the autumn budget later in November.

Economists expect Starmer’s right-hand woman at the Treasury, Chancellor Rachel Reeves, to be forced to break Labor platform promises not to raise taxes on workers when she reveals her tax plans in the November 26 budget.

Reeves finds herself in an unenviable position as she attempts to plug a fiscal black hole caused by Labor’s spending promises, U-turns on reform-related spending cuts and its own rules on limiting borrowing.

The increase in taxes on workers is likely to upset not only voters, who have expressed disappointment with Starmer’s leadership since Labour’s landslide victory in the July 2024 election, but also senior members of the Prime Minister’s senior team in the Cabinet.

The BBC reported on Wednesday that a number of high-profile names – and Starmer allies – are being circulated as potential replacements for the prime minister if a leadership challenge is launched, including Health Secretary Wes Streeting and Home Secretary Shabana Mahmood.

Other names reported by the BBC include Ed Miliband, the energy minister, and backbenchers including former transport secretary Louise Haigh.

The man seen as the main contender when it comes to a possible challenge to Starmer’s leadership, Wes Streeting, has denied there was a plot, telling Sky News on Wednesday that he had no intention of trying to oust the prime minister. He instead accused the prime minister’s allies of making exposes against him in what he called “self-defeating and self-defeating behavior.”

Asked if he would mount a leadership challenge after the budget, Streeting told Sky’s ‘Mornings with Ridge and Frost’: “No”, saying late-night briefings on the subject were “totally counterproductive… not least because it’s not true”.

Streeting said that although he had not supported Starmer’s initial bid to lead the Labor Party, he had supported the Prime Minister “from the moment he was elected”.

Either way, the narrative around a possible leadership challenge is damaging for a prime minister who is seen as having performed well on the world stage – having ingratiated himself with US President Trump and fellow EU leaders, and striking trade deals with the US, India and EU over the past year – but performing poorly with domestic voters.

Public discontent with illegal immigration, the economy and the criminal justice system, following several recent accidental prisoner releases, has increased in recent months with growing support for the right-wing Reform Party, making it a major threat in May’s local elections. The next legislative elections are not expected to take place before 2029.

An October YouGov poll showed that just 21% of Britons had a favorable view of the prime minister, compared with 72% who viewed him unfavorably. That left Starmer with a net favorability rating of -51, which is the lowest recorded by YouGov so far, the pollster said.

Analysts say the risks to Starmer’s leadership are “probably noise for now” and the Prime Minister will stay in office for now. Nonetheless, Starmer’s critics are growing in confidence and probably smelling blood, with the Budget and next year’s local elections in May the next big litmus test of public opinion potentially decisive tipping points.

“Starmer is facing the worst opinion poll in the history of a modern prime minister and there is no smoke without fire,” Jordan Rochester, head of FICC EMEA strategy at Mizuho Bank, said in emailed comments on Wednesday.

“If the budget is passed without major upheaval, the idea of ​​a leadership replacement will be floated in May’s local elections, where polls suggest a heavy loss for Labor. A time that could lead to leadership changes,” he added.

There are two scenarios as to what this means for markets, Rochester said, noting: “We lean toward maintaining ‘centrism’ as the ultimate winner, but if and when that happens, the market will have to price in the risk of a radical left shift.”

Markets were closely watching Wednesday’s reports, with yields on UK government bonds – known as gilts – rising slightly across the maturity curve on Tuesday.

Around 10:10 a.m. in London, the yield on the benchmark 10-year gilt gained 3 basis points to trade at 4.419%. Bond yields and prices move in opposite directions. So, when investors are reluctant to lend to a government, the price of the bond falls and the yield increases.

The UK government currently has the highest borrowing costs of any G7 country, with the 30-year government bond yield well above the critical threshold of 5%.

Meanwhile, the British pound fell 0.27% against the US dollar to trade at $1.311 and lost 0.1% against the euro.

“The markets are watching Westminster closely,” commented Nigel Green of the deVere group on Wednesday.

“Rumors of government leadership surfacing ahead of a crucial budget reinforce the sense that the government is under pressure. Investors are not yet pricing in political instability, but they are alert to the risk that this story could repeat itself in the new year,” he added.

“We think there is unlikely to be an immediate leadership challenge after the budget – the priority will be to get it through cleanly, but this will be extremely difficult when it appears that income tax increases are now almost inevitable.”

— CNBC’s Chloe Taylor contributed reporting to this story.