Fears of Truss-style turmoil rise if Labour Left-wingers oust Starmer, warns City economist

A leading City economist warned that Liz Truss-style economic turmoil could re-emerge if Labour is pushed left by its own members and Keir Starmer is ousted, with the pound and government borrowing costs potentially spiking as a result. In a note published ahead of next year’s political cycle, Simon French, chief economist at Panmure Liberum, said the chances of a leftward pivot within the Labour Party are increasing and could come to a head in the spring. Updated: 22:01 GMT, 15 December 2025.

French warned that the market reaction would depend on the specifics of any pivot, but suggested a scenario in which a new prime minister would not employ pre-emptive mitigations to head off a disruption in currency and gilt markets. He said traders would likely reprice UK assets to reflect a more inflationary public policy mix, higher taxes and increased gilt issuance if spending and borrowing surged under a different economic framework. He drew a direct parallel with the ill-fated mini-budget in 2022, when the government performed an economic U-turn mid-Parliament to pursue a markedly different agenda from the manifesto presented to voters.

In that 2022 episode, UK gilts sold off and yields rose sharply, inflating government borrowing costs and triggering a chaotic chain of effects that unsettled pension funds until the Bank of England stepped in to stabilise financial markets. French’s projections for a worst-case leftward outcome next year include five-year gilt yields moving toward 5%, a level not seen since the financial crisis era. He warned that the pound could slide to around $1.20 to the dollar, a post-2023 low, should investors reassess the risk of higher inflation and more aggressive fiscal policy.

The note comes amid renewed public speculation about political leadership within Labour, including chatter that Mayor of Greater Manchester Andy Burnham could seek a return to Parliament to challenge Starmer. Starmer’s party polling has been weak by historic standards, fueling talk of a leadership challenge as local elections approach next May. French cautioned that even with three and a half years left in the current Parliament, a shift to the left remains a live possibility that could rapidly alter market expectations.

French stressed that the exact market response would hinge on how any leftward pivot is framed and implemented. He said a shift that includes targeted spending, but with credible fiscal rules and a credible plan to reduce deficits, might not unleash an uncontrollable market reaction. But a more expansive or uncertain policy mix — particularly if it involves rapid tax changes or a large increase in gilt issuance without offsetting measures — could provoke a sharp repricing of UK assets and a re-evaluation of future inflation trajectories.

As markets weigh the risk of a potential political realignment, the question for policymakers, investors and the public is whether any Labour leadership shift would be accompanied by a disciplined approach to public finances, or whether it would echo the 2022 drama where a hasty policy reversal precipitated a destabilising political and economic sequence. The Bank of England’s experience a few years ago underscored how the central bank can become a caretaker of financial stability when political decisions threaten to destabilise markets. While French did not rule out all risk, he did suggest that a naively aggressive leftward approach would be unlikely to recur in full, even if the political dynamic feels unsettled.

Even as the political narrative evolves, the potential for market volatility remains a live backdrop to Labour’s internal debates and to the broader economic outlook. If the party adheres to a steady, inflation-focused path with clear fiscal rules, the immediate risk to financial markets could be more contained. If, however, the party signals a more expansive approach to public spending and taxation without credible discipline, traders could reprice assets in anticipation of higher inflation and greater gilt issuance, with the pound bearing the brunt of that reassessment. The coming months, including any leadership developments and policy signals, will be watched closely by investors seeking to calibrate risk in a world where political and economic expectations can shift rapidly.