Rachel Reeves could soon be replaced as Chancellor following Sir Keir Starmer’s resignation. While the new Prime Minister does not have to dismiss the Government’s chief finance minister, political realignment within the Labour Party makes the sitting Chancellor likely to lose her job.

Andy Burnham is being widely tipped to take over from Starmer, with his allies leaking to The Times that he would sack the current Chancellor if he became Prime Minister. They believe Reeves is too closely tied to Starmer’s legacy and to the party’s failure to maintain control of public finances. Experts have now warned that her departure could lead to higher borrowing costs, potential tax rises and a surge in everyday costs.

Borrowing costs could rise higher

Andrew Prosser, head of investments at InvestEngine, said investors are concerned over who will replace Reeves as Chancellor.

He explained how it is unclear whether the new Chancellor would continue her “cautious approach” or move closer to Burnham’s agenda, which includes lowering everyday costs for lower earners.

Mr Prosser said: “If investors believe a new Chancellor is more likely to loosen the fiscal rules, increase borrowing or delay difficult tax and spending decisions, gilt yields could rise. Gilts are UK Government bonds, and their yields help influence the wider cost of borrowing across the economy.

“That can matter for anyone taking out a mortgage, remortgaging, using a personal loan, financing a car or running a small business. People already locked into fixed-rate mortgage deals may not feel the impact straight away, but those coming to the end of a deal could face higher rates if market borrowing costs rise.”

He continued: “This is why the identity and approach of a new Chancellor would matter. Burnham has been linked with more public control of utilities, transport and housing, as well as extra support for renters and households struggling with bills.

“These ideas may appeal to voters, but investors would want to know how they would be paid for. If they think the answer is more borrowing, mortgage and loan costs could come under pressure.”

Tax hikes for higher earners

Meanwhile, the expert has also warned of potential tax rises. This is because a new Chancellor may seek to reassure the markets without cutting spending.

Mr Prosser explained: “Burnham has reportedly backed Labour’s pledge not to raise income tax, VAT or employee National Insurance, while also supporting Rachel Reeves’ fiscal rules.

“But he has floated some changes to income tax. He has proposed raising the personal allowance, currently £12,570, which would mean people can earn more before income tax kicks in.

“That could give lower and middle earners a boost to take-home pay. At the same time, he has previously backed restoring the 50% top rate of income tax, up from 45%. That would not affect most workers, but it would mean higher tax bills for the highest earners.”

A weakening pound

Finally, everyday prices could rise due to the pound weakening. If the markets become nervous about the UK’s economic direction, the pound will weaken as global investors reduce their demand for British assets such as stocks, bonds and real estate.

Mr Prosser said: “A weaker pound makes imports more expensive. That can feed into the price of food, fuel, clothes, electronics and holidays abroad. It can also make inflation harder to bring down, which could make the Bank of England more cautious about cutting interest rates.

“For households, that could mean the cost of living feels stickier for longer, even if headline inflation is lower than it was during the peak of the crisis.

“Burnham’s focus on lowering the cost of essentials could partly offset this pressure for some households. He has been associated with plans to bring water and energy under stronger public control, shift some green levies away from electricity bills and keep local transport costs down.

“In theory, that could help reduce some everyday costs. But if markets see those plans as expensive or underfunded, sterling could weaken, making imported goods more expensive.”