Sharks are circling UK PM Keir Starmer, with his leadership vulnerable

U.K. Prime Minister Keir Starmer is looking increasingly vulnerable this week amid mounting speculation that he could face a leadership challenge after the Autumn Budget later in November.

Economists expect Starmer’s right-hand in the Treasury, Chancellor Rachel Reeves, will be forced to break Labour Party manifesto pledges not to raise taxes on workers when she unveils her fiscal plans in the budget on Nov. 26.

Reeves finds herself in an unenviable position as she tries to fill a fiscal black hole caused by Labour spending pledges, U-turns on reform spending cuts and her own rules on limiting borrowing.

Raising taxes on working people is likely to upset not only voters, who have expressed disappointment with Starmer’s leadership since Labour’s landslide election win in July 2024, but also prominent members of the PM’s top team in the Cabinet.

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

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

The man seen as the main contender when it comes to a potential challenge to Starmer’s leadership, Wes Streeting, denied a plot was afoot, telling Sky News Wednesday that he is not planning to try to oust the PM. He instead accused allies of the PM of briefing against him in what he said was “self-defeating and self-destructive behaviour.”

When asked if he will launch a leadership challenge after the budget, Streeting told Sky’s ‘Mornings with Ridge and Frost’ program: “No,” saying overnight briefings on the matter were “totally self-defeating … not least because it’s not true.”

Streeting said while he hadn’t backed Starmer’s initial bid to lead the Labour Party, he had supported the PM “from the moment he was elected.”

In any case, the narrative around a potential leadership challenge is damaging for a prime minister who is seen as having performed well on a global stage — ingratiating himself with U.S. President Trump and fellow EU leaders, and achieving trade deals with the U.S., India and EU in the last year — but performing badly with voters at home.

Public dissatisfaction over illegal immigration, the economy and the criminal justice system, following several recent accidental prisoner releases, has grown in recent months with support for rightwing Reform party growing, making it a major threat when local elections are held in May. The next general election is not due to be held until 2029.

A YouGov poll in October showed that just 21% of Britons holding a favorable opinion of the prime minister with 72% seeing him unfavourably. That left Starmer with a net a favourability rating of -51, which is the lowest recorded by YouGov so far, the pollster said.

Analysts say the risks to Starmer’s leadership are “likely to be noise for now” and that the PM will stay in office, for now. Nonetheless, Starmer’s critics are growing in confidence and likely smell blood, with the budget and next year’s local elections in May, the next big litmus test of public opinion, potentially decisive crunch points.

“Starmer faces the worst opinion polling in history of any modern Prime Minister and there is no smoke without fire,” Jordan Rochester, head of FICC Strategy EMEA at Mizuho Bank, said in emailed comments Wednesday.

“If the budget passes without major upset, the idea of leadership replacement will be kicked into May’s local elections where polls suggest a big loss for Labour ahead. A moment that can lead to leadership changes,” he added.

There are two scenarios for what this means for markets, Rochester said, noting: “We lean to a continued “centrist” being the ultimate victor, but if and when this happens the market will need to price in the risk of a hard left shift.”

Markets were keeping a close eye on reports Wednesday with yields on British government bonds — known as gilts — edging higher across the maturity curve on Tuesday.

By 10:10 a.m. in London, the yield on the benchmark 10-year gilt added 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 rises.

The U.K. government currently has the highest borrowing costs of any G-7 nation, with its 30-year gilt yield trading well above the critical 5% threshold.

Meanwhile, the British pound fell 0.27% against the U.S. dollar to trade at $1.311, and shed 0.1% versus the euro.

“Markets are watching Westminster closely,” Nigel Green of deVere Group, commented Wednesday.

“Government leadership rumours surfacing before a crucial Budget reinforce the sense that the government is under strain. Investors aren’t yet pricing in political instability, but they’re alert to the risk that this story could return in the new year,” he added.

“We believe there’s unlikely to be an immediate leadership challenge after the Budget — the priority will be getting through it cleanly, but this will be extremely tough after it looks like income tax rises are now almost inevitable.”

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