UK facing debt crisis with risk of IMF bailout

International markets once again have doubts about Britain’s economic stability, drawing comparisons to the 1976 crisis when Labour’s James Callaghan had to seek an IMF bailout. Nearly fifty years later, Chancellor Rachel Reeves is under pressure to calm global investors as borrowing costs hover near their highest level since the late 1990s, just ahead of an autumn budget. With weak growth, stubborn inflation, and strained public finances after Labour’s welfare reversals, economists expect Reeves to raise taxes to cover a £20–40 billion gap in her fiscal plans.

Recent headlines, including one in the Sunday Telegraph warning of a looming IMF bailout, highlight the nervous mood. Some economists, though, call such comparisons overblown. Former Bank of England policymaker Michael Saunders dismissed the IMF talk as “nonsense,” acknowledging Britain’s weak fiscal position but rejecting the idea of imminent collapse. Others, such as Cambridge economist Jagjit Chadha, warn that the UK’s current path is unsustainable and that risks should not be minimized.

Unlike the 1970s, when inflation hit 25%, interest rates soared to 15%, and sterling collapsed, today’s backdrop looks more stable. Inflation is expected to peak near 4%, growth in early 2025 was the fastest in the G7, and demand for government debt remains strong—this week’s £5 billion gilt auction was more than three times oversubscribed. The pound has also gained ground against major currencies, and the Bank of England recently cut rates slightly to 4%.

Still, the political shadow of the 1976 bailout lingers. That episode became synonymous with national embarrassment and contributed to Labour’s loss in 1979. Reeves now faces the challenge of convincing both markets and voters that her government can manage the fiscal strains without repeating history.