Economists urge fiscal discipline after ‘rollercoaster’ week for bond market

Jul 4, 2025 - 17:00

Chancellor Rachel Reeves is widely expected to unveil fresh tax hikes later this year.

Economists have called on Chancellor Rachel Reeves to exercise fiscal discipline after a “rollercoaster” week in the bond market exposed the precarity of the government’s finances.

Yields on 10-year gilts briefly rose more than 20 basis points, the highest intraday rise since the ill-fated Liz Truss minibudget in 2022, after Reeves appeared distraught in the House of Commons chamber and Prime Minister Keir Starmer refused to back her.

They had already risen earlier in the week after the government U-turned on its welfare reform bill, a move which is set to slap an extra £5bn on top of already-swelling government spending, raising concerns among investors that the government’s fiscal deficit was getting out of control.

Yields cooled down on Thursday when Starmer gave Rachel Reeves his full support, and Reeves made a public appearance in which she described her distress as a “personal matter”, in signs markets felt a change in leadership at Number 11 could have led to more instability.

“A volatile week for gilts demonstrated the importance of the UK government maintaining a credible commitment to fiscal discipline,” said Andrew Goodwin, Chief UK Economist at Oxford Economics.

“The episode demonstrated that markets view Reeves as a Chancellor who offers a credible commitment to fiscal discipline, with the subtext being that potential successors may not be as restrained.

“The experience will also have demonstrated to the government that markets will likely look unfavourably on any further loosening of the fiscal rules, increasing the chances that we see large tax rises in the Budget this autumn.

“Abandoning the welfare reforms will force the government to make £5bn a year worth of savings elsewhere, while its earlier U-turn on winter fuel payments added another £1.2bn. But in reality, the impact of these policy changes is likely to pale in comparison to the increase in borrowing that will result from the Office for Budget Responsibility downgrading its growth forecasts.”