UK Treasury officials are concerned that the prime minister’s talk of using “flexibility” within the fiscal rules to ramp up investment could backfire by destabilizing financial markets, according to people familiar with the thinking.

The concerns center on Rachel Reeves, the chancellor, and her commitment to maintaining strict fiscal discipline. Officials fear that signaling potential deviations from established fiscal rules might spook investors and undermine confidence in UK economic policy.

Prime Minister Keir Starmer has emphasized the need for increased public investment to drive growth, but Treasury sources worry that market reactions could outweigh the intended benefits. The debate reflects broader tensions within the government about balancing fiscal prudence with ambitious spending plans.

Financial markets have already shown sensitivity to UK fiscal policy signals, with bond yields reacting to previous uncertainty. Officials stress that any relaxation of fiscal rules must be carefully managed to avoid triggering the kind of market volatility seen during previous periods of fiscal loosening.

The situation highlights the delicate nature of post-pandemic fiscal policy and the challenge facing Starmer and Reeves as they attempt to navigate competing priorities while maintaining market confidence.