SocGen Predicts Limited Borrowing Capacity for UK After Starmer

Impact of Potential Leadership Change on UK Borrowing

LONDON, Jan 15 (Reuters) - A new British leader would not have scope to significantly lift government borrowing if Keir Starmer is replaced as prime minister later this year, Societe Generale's UK economist told Reuters, describing the bank's base case scenario.

Current Economic Context

For international investors a UK leadership change is "not really on the radar," Sam Cartwright told Reuters, but he expects any new prime minister to appoint a markets-friendly finance minister.

Predictions for Future Leadership

SocGen is among the first of the big banks to tell clients Starmer's departure is likely. Online prediction market platform Polymarket gives a 29% chance of Starmer being replaced by end-June - after mid-term elections - and a 53% chance by year-end.

Market Reactions and Investor Sentiment

Starmer, facing low opinion poll numbers and speculation about a possible leadership challenge, said earlier this month he would still be in power in year's time.

His Labour Party trails the populist Reform UK in polls after winning a landslide victory in the 2024 national election. 

"The Labour Party is almost certain to suffer heavy losses in the May 2026 local elections, at which point we believe a leadership challenge is likely," Cartwright said.

"Nonetheless, with government borrowing at 4.5% of GDP, the UK still facing the highest bond yields in the G7, and lingering market jitters over UK debt following the Liz Truss debacle, gilt markets, not the fiscal rules, remain the real constraint on increased borrowing," he said. 

Former Prime Minister Truss left office in 2022 when bond prices slid in reaction to her budget plans.

Britain's 10-year government bond yield is trading at around 4.36%, near its lowest levels since late 2024. However, it remains the highest in the G7 group of industrialized economies.

"Therefore, any prospective new leader would have limited scope to loosen the purse strings beyond current plans," Cartwright added. 

Starmer and finance minister Rachel Reeves have u-turned on welfare reforms in the past year in the face of pressure from Labour politicians. Analysts say some possible alternatives to Starmer within the Labour Party would wish to increase government spending, maybe through borrowing. 

Since November's budget and a focus on the United States and geopolitical events elsewhere in the world, British political risk has dropped down investors' watchlist.

Big investors broadly welcomed British finance minister Rachel Reeves' tax-raising November budget that gave her more leeway to meet her fiscal targets.

(Reporting by Dhara Ranasinghe and Alun John, editing by Elisa Martinuzzi and Toby Chopra)