City fears Rayner’s rise as she warns Starmer that Labour is ‘running out of time’

Angela Rayner’s ascendancy to the Labour leadership has been flagged as a risk for public finances as the former deputy prime minister said the party was “running out of time”. 

At a rally on Tuesday night, Rayner suggested that Labour was viewed as representing “the establishment” and said the party’s survival was “at stake”. 

She told activists: “As a party, and as a movement, we cannot hide, we cannot just go through the motions in the face of decline. There’s no safe ground and we’re running out of time. The change that people wanted so desperately needs to be seen, it needs to be felt.”

The comments, which have been taken as a swipe at the Labour leadership, have added to speculation that she was planning her return to the frontbenches and could look to take over from Sir Keir Starmer after the May elections. 

Market analysts have warned that a Rayner leadership could erode investors’ confidence in the government. Reports have suggested that she has joined a call hosted by BNP Paribas in a bid to win over the City and re-assure execs that she would oversee a fiscally responsible government. 

The Rayner premium

Capital Economics market analyst Joe Maher suggested investors would be “less forgiving” if Rayner took control and advocated for higher government spending. 

He indicated that Rayner could add around 20 basis points to medium-term gilt yields and translate into higher government borrowing costs while the sterling pound could fall by around one per cent against the euro. 

Government borrowing costs are set to total around £110bn in the current financial year, a few billion pounds off the size of the education budget. Before the pandemic, debt interest payments were around £60bn.

Should Rayner promise “an aggressive increase in borrowing”, the market reaction could be similar to Liz Truss’ mini-budget when the 10-year gilt yield rose by around 200 basis points. 

One City source said the former deputy leader’s attempts to reassure investors were being taken with a “pinch of salt” given she had previously called for increases in taxes and borrowing.

Burnham backs Rayner

Similar market scenarios could apply if Manchester mayor Andy Burnham rose through the Labour ranks and returned to Westminster. Burnham has faced criticism for doubling down on comments that the government had been “in hock” to the bond markets. 

On Wednesday morning, Burnham defended Rayner’s intervention, saying that Labour will “always do well to listen” to her. 

“I understand the frustration people feel. We heard that at the by-election, and of course, Angela is reflecting some of that,” he told the BBC.

Other market analysis has pointed to similar trends as drawn out by Capital Economics. Earlier this year, Pantheon Macroeconomics said there was the possibility of a “resurgence in fiscal risk” as the May election would be a “flashpoint”. 

Rayner capturing the keys to Number 10 would also spell trouble for the UK’s banking sector, analysts have warned over the last year. 

During her stint as deputy prime minister, the darling of the Labour left launched a major intervention to try and curb welfare reforms from the Treasury.

A leaked memo after last year’s Spring Statement revealed that Rayner lobbied the Chancellor to hike taxes on the UK’s banking sector – among other cash grabs on savers – in a bid to balance the books.

The move offered a stark insight into one of the top candidates to replace Starmer’s fiscal agenda.

Jefferies analysts said in January: “Any leadership battle will be uncomfortable for equity investors and the gilt market.”

“And bank holders may be particularly concerned by certain potential combinations”.

They noted a Rayner premiership, with the likes of pensions minister Torsten Bell in No.11, would be likely to “lift bank taxes, as proposed in the former’s leaked memo from early 2025”.

The analysts described a scenario where work and pensions secretary Pat McFadden inherits the post of Chancellor as more likely to be “taken well by markets”.

Earlier this month, the same analysts said the risks were “not that different” to what they had previously noted.

John Cronin, banking analyst at Seapoint Insights, has said while a hard left Chancellor taking the helm would be “extremely unlikely”, it would trigger “significant selling pressure” on equities.

Reeves sends message to Labour backbenchers

The return of leadership speculation will pile pressure on Starmer at a time where the government is facing economic risks from disruption across the Strait of Hormuz. 

After delivering her Mais Lecture on Tuesday, Chancellor Rachel Reeves appeared to take a jab at Labour backbenchers who have called for the government to spend more funds. 

She said that the UK economy and public finances were in a “stronger position” because of her fiscal rules. 

In an indirect message to colleagues in the Labour Party, she added: “Anybody who thinks this is the moment to change course, I’d just say to them that be very careful about what you are doing and what you are advocating.”