UK Chancellor Rachel Reeves Faces Crucial Test as Tax-Heavy Budget Nears

A year ago, UK Chancellor Rachel Reeves declared, “We should never have to produce a budget like that again,” insisting she had restored stability to the public finances and would not return with more tax hikes.

But when she presents her second annual budget on Wednesday, she is widely expected to announce another round of substantial tax increases—an early test of the Labour government’s credibility, and one closely watched by increasingly anxious bond markets.

The first 18 months of leading the world’s sixth-largest economy have been anything but smooth for Reeves. A former Bank of England economist and the first woman to serve as Chancellor, she has positioned herself as a corrective to years of political turbulence in Westminster.

Yet mixed signals from her and Prime Minister Keir Starmer on taxation have shaken confidence among investors and voters, putting her credibility—and potentially Starmer’s political standing—at risk. According to YouGov, only 9% of Britons think she is doing a good job, while 61% disagree.

Critics mock her as “Rachel from accounts,” a stereotype of an unimaginative office worker, but Reeves insists she is not in politics to be popular. She points to new public investment in nuclear power and the National Health Service as evidence of her impact.

“We haven’t done everything we want to do—of course not,” she told the BBC this month. “But we are making progress.”

A chess player searching for a turnaround

Once a standout school-level chess champion, Reeves is hoping for what players call a “swindle”—forcing a draw or even a win from a losing position. In political terms, that means convincing financial markets she has a credible plan for the nation’s finances while persuading restless Labour MPs that the party’s landslide victory last year hasn’t been squandered.

Reeves has championed “securonomics,” the idea that governments must be prepared for an era of constant economic shocks. But this month she blamed Donald Trump’s new trade tariffs and global instability for eroding the small fiscal buffer she had set aside for herself.

One Labour MP, speaking anonymously, said Reeves was unfortunate in her circumstances—“but perhaps she should have been better prepared.”

Behind the “iron-clad” image

Colleagues describe Reeves as warmer and more approachable than her public reputation as the guardian of “iron-clad” fiscal rules suggests. That image slipped in July when she broke down in Parliament, prompting speculation about her future.

“Most people have had a day at work when they go to the loo and cry, or tell their boss they’re going home early,” she told The Times. “Unfortunately, my difficult moment happened on live television.”

The episode highlighted communication failures inside Starmer’s government. He publicly backed her only after gilts had already sold off, a reminder of how investors remain alert to any sign of instability after the 2022 “mini-budget” crisis under Liz Truss.

Investors criticise her—but fear the alternative more

Earlier this month, Reeves had been preparing the ground for an income tax rise, warning that sticking to Labour’s promise not to raise the rate would require deep cuts to investment. So when government sources signalled a sudden U-turn—that income tax would not rise—markets were startled. Investors now expect a series of smaller tax increases instead, with little meaningful boost to revenues.

Gilts fell, and officials blamed the shift on better-than-expected economic forecasts.

“She had built up some credibility—gilts were responding to that—and then she lost it,” said David Zahn, head of European fixed income at Franklin Templeton. Nicolas Trindade of AXA Investment Managers added, “This is a G7 economy. We can’t keep doing this.”

Even so, investors worry that any replacement Chancellor would be less fiscally cautious—and that losing Reeves could seriously damage Starmer’s government.

“The gilt market isn’t in the mood for uncertainty,” said Lauren van Biljon, senior FX and rates manager at Allspring Global Investments.

Despite recent volatility, many investors still favour UK bonds, and 10-year yields remain well below the 27-year highs hit in September. Long-dated gilts have outperformed most G7 peers this year, though since Labour’s election victory in July last year, their relative performance looks less impressive—worse only than Japanese government bonds.

Good reception in the US, colder at home

While under pressure domestically, Reeves reassured finance and business leaders during a recent trip to the United States, including at a private meeting hosted by the Institute of International Finance, according to a source present.

At home, however, business sentiment has cooled—driven in part by last year’s tax increases on employers and continuing uncertainty. On Monday, the head of the Confederation of British Industry accused her of shutting companies out of key policy discussions, a sharp contrast to her pro-business tone before the election.

The biggest threat remains the nervous bond market, followed closely by Labour lawmakers who could turn against her if investors react badly to Wednesday’s budget.

Starmer has tied his fortunes closely to hers. “This is a partnership,” he told the BBC in July. “She and I work together, we think together. We’ve got each other’s backs.”