Rachel Reeves told investors at the FT Global Bond Summit she hopes to avoid raising taxes to fund the government's proposed £13.5bn defence spending increase. The chancellor's comments come after John Healey resigned as defence secretary last week, arguing the spending boost falls short of requirements. Reeves insisted any additional funding must come from cuts elsewhere in government budgets, requiring cabinet-wide decisions on reallocation.

UK gilts have faced significant pressure from Middle East conflict-driven inflation, pushing ten-year borrowing costs from 4.2 per cent in February to a peak of 5.2 per cent last month. Yields have since retreated below 4.8 per cent on hopes for a US-Iran deal. With debt servicing costs exceeding £100bn annually and projected to reach nearly 4 per cent of GDP by 2030-31, investors are questioning fiscal sustainability.

Political uncertainty compounds market concerns, particularly speculation around Andy Burnham potentially challenging Sir Keir Starmer's leadership. Reeves acknowledged the market's focus on who might replace her, stating she's concentrating on reducing the budget deficit to lessen reliance on bond markets. The chancellor welcomed Burnham's commitment to existing fiscal rules while navigating pressure from both defence advocates and market discipline.

Reeves faces a difficult balancing act between meeting NATO commitments, managing the highest G7 borrowing costs, and maintaining fiscal credibility ahead of the autumn Budget. The defence funding debate has exposed tensions within Labour's economic strategy at a time when gilt investors demand clearer fiscal direction.