Ritika Gupta looks back at a year dominated by Budget turbulence for the U.K.'s Labour Party government, and what could be ahead in 2026.

London

The Labour government in the United Kingdom, led by Prime Minister Keir Starmer, is experiencing significant political and economic challenges less than 18 months after its dramatic election victory. The government's recent budget, which introduced substantial tax increases and pushed the national tax burden to a post-war high, has drawn criticism from opposition parties and contributed to Starmer's record-low approval ratings.

Amid these developments, outsider parties such as Reform UK and the Greens are gaining traction, and speculation about potential leadership challenges within Labour is growing ahead of local elections. Financial markets have responded with relative stability in government bonds and strong performance in the FTSE 100, though concerns persist about the domestic economy and the lack of growth-focused policies.

UK Labour government under pressure heading into 2026

It would be an understatement to say it's been an eventful year for British politics. From a blockbuster budget to the rise of outsider parties, the stage is set for another rollercoaster in 2026. It's not even a year and a half since Labour came into power in one of the most dramatic election victories in British political history. But Prime Minister Keir Starmer has since notched the worst approval rating on record, even worse than Liz Truss during her budget meltdown and Margaret Thatcher during the poll tax riots. November's budget was by far the biggest political event of the year, with weeks if not months of anticipation and briefings. The Office for Budget Responsibility has said it actually complained to the Treasury about the volume of leaks before Chancellor Rachel Reeves announced her fiscal plans, before it itself leaked the budget early in an unprecedented misstep. Certainly during the lead-up to the pre-measures forecast when there was speculation, some of these misconceptions, as I've described them, were appearing in the press and we made it clear that they were not helpful and that we weren't in a position, of course, to put them right. The tax rises announced in the budget are forecast to total £26.1 billion in the 2029-30 tax year. But the Bank of England says the policies could pull down CPI inflation in the short run by as much as half a percentage point. Either way, the measures are set to push the UK's tax burden to over 38% of GDP, according to the OBR, a new post-war high. Opposing lawmakers condemned the move. This is a huge tax grab, a lot of it landing on the shoulders of working people. No, I don't think this has been the right thing to have done. What she should have been doing is controlling government spending and actually getting taxes down as a means of growing the economy. The only way to change the doom loop that this country has been in for years is to reduce spending and allow that tax burden to come down, allow workers to keep more of their wages, to allow corporations to pay less tax, and she's doing the opposite. Zia Yousaf there from Reform UK, a party that won only five seats in the general election. But if polling is to be believed, could form a government at the next election. It's the key winner of a shift away from the established Labour and Conservative parties. Also in focus over the last few weeks, the Greens, which despite having only four MPs, is catching up with Labour. And why does this matter? Because next May will bring a fresh test in the form of local elections, where the party could face a wipeout and figures within Labour reportedly eyeing a challenge for the leadership. Health Secretary Wes Streeting was forced to deny rumours he could mount a challenge of his own in November after sources close to Starmer issued briefings against him in a move that sparked criticism across Westminster. They say a week is a long time in politics. Well, in a year, anything can happen. Ritika Gupta, CNBC Business News. Ritika joins us with more. Ritika, what happens on the political front seems somewhat significant to the fortunes for UK assets. And if you look at the 10-year gilt, it's settled down in recent weeks, so almost parking it out to a challenge if it comes in 2026. But if there were to be a challenge to Sir Keir Starmer, you'd have to think there'd be a reaction on bond markets. Yeah, I'm glad you brought up the markets that we've seen over the year and what we can expect for 2026. Because it has been interesting. You mentioned the gilt market there. Actually, yields have come down a little bit more than what was maybe expected that we saw at the beginning of the year. Because one reason in the budget, whilst it was hard to be fully optimistic about it, she did actually manage to double that headroom. So that was something that did keep the markets in check. But there was talks about the fiscal consolidation being backloaded to potentially 2029. So that was another thing. I think the concern for next year, though, for the gilt market will be if there is a leadership challenge for Keir Starmer and Rachel Weaves. If they are replaced by leaders who are more or less fiscally conservative, I should say, and want to spend more, I think that will be maybe a challenge for the gilt markets. And we'll have to see how they respond. I do think it's interesting, though, when we look at the stock market, Karen, the FTSE 100 has performed really well this year. I think some 19% or so year-to-date outperforming the S&P 500. So it is interesting to see that despite all that economic, political uncertainty, at least for the stock market, so we have seen a significant rise there for UK stocks. When it comes to some of the developments in the outlook for 2026, how much weight do you think investors are putting when it comes to not just the political dynamics here, but also the fact that we are seeing a little bit of pressure when it comes to some of the data? Yeah, it's a good question, weighing up what we're seeing with the data and of course the politics as well. And I mentioned one of the concerns next year for investors would be if there is, again, this leadership challenge, what that could mean for the gilt market. When, again, coming back to stocks, though, the FTSE 100 has done well this year. And I have spoken to some money managers who do still see potential upside for 2026 and some saying that they could see some record highs next year. JP Morgan sees the FTSE 100 actually rising as much as 10% in the new year, despite all of this concern. We also have seen some benefit this year, of course, with a bit more of a move away from the US with tariffs, Liberation Day. I think that has something that has really helped the UK market. But of course, we'll have to see if that continues on into 2026. That said, the outperformance of the FTSE 100 in contrast to the FTSE 250. So if we talk about the domestic focus here, it does feel as though there is some element of malaise, the economic situation in the UK overshadowing some of the small, medium sized companies here. That really needs to be corrected next year if we are talking about UK resilience. And that is a true sounding board for what we're seeing in Downing Street. Yeah, that's a great point. Again, with the FTSE 100, we're talking about companies that are exposed internationally, and we're seeing internationally in the US, they're doing well. So it's the FTSE 250, of course, domestically focused. I think that's going to be a crucial test when it comes to how the markets are viewing the UK. And I think that's been an ongoing question that we've talked about is the UK and the growth and the sluggishness that we are seeing in the UK economy that just really wasn't addressed in the budget. We had a lack of growth policies, quite ironic, really, given that our Chancellor has been positioned herself as a pro-growth Chancellor, yet we didn't really get that in the budget.

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