Kemi Badenoch warned on Tuesday that Britain could be forced to seek an International Monetary Fund bailout if the Labour government does not produce a credible plan to lift growth and rein in borrowing.
Speaking to BBC Newsnight ahead of a speech in the City, the Conservative leader said recent rises in government borrowing costs were evidence the country was at risk of a repeat of the 1976 crisis, when then-Chancellor Denis Healey negotiated IMF assistance amid surging debt and a collapsing pound.
Badenoch said the Conservative Party would offer to work with Prime Minister Keir Starmer to bring welfare spending down so taxes and borrowing did not have to rise. "If we're to cut spending and avoid more punishing tax rises at the Budget, crushing business confidence and pushing up inflation, Keir Starmer has to change his approach," she said. "Let's agree a way to bring welfare spending down. And I will offer him the support of the Conservative Party."
Badenoch accused Chancellor Rachel Reeves of creating a "tax doom loop" that would push the deficit higher and increase pressure on gilt markets. Last week, long-term UK government borrowing costs rose to levels their highest in more than two decades — a jump Badenoch cited as a warning sign — though yields have since fallen back to levels seen in August.
Reeves has sought to play down reports of a £50 billion shortfall in the public finances ahead of her second Budget, saying the government was not planning an immediate package of tax rises. A Downing Street official said the government would set out its plans in the autumn Budget, scheduled for November.
Labour sources dismissed Badenoch's offer of cross-party cooperation as "a gimmick". The exchange comes after the appointment last week of Pat McFadden as Work and Pensions Secretary, who will head a combined department overseeing skills policy transferred from the education department. McFadden told staff on Monday that tackling the rise in young people not in education, employment or training was an early priority.
Badenoch said she would use her City speech to recommit the Conservatives to maintaining the two-child benefit cap, a policy under pressure from Labour backbenchers and from Reform UK, which has pledged to abolish the cap. She also suggested the party could play a constructive role in shaping welfare reform if the government engaged with Conservative proposals.
Markets have recently reflected concern about the UK's fiscal position. Yields on 30-year gilts rose sharply amid a broader global bond sell-off, prompting commentary in political and financial circles about confidence in the government's ability to manage the public finances. Analysts have noted the rise in borrowing costs increases the importance of clear growth and fiscal plans ahead of the autumn Budget.
Badenoch framed the warnings in stark historical terms. "We are not growing enough, Labour does not have any plan for growth," she said, adding that without action "we will end up going to the IMF cap in hand." The Labour government has said it recognises the economic challenges and will set out its plan for sustainable growth and public finances in the coming months.
With the November Budget approaching, the debate is likely to focus on whether ministers will prioritise fiscal consolidation through spending cuts, tax rises or a mix of both, and whether cross-party talks on welfare could reduce the need for higher taxes. The government faces competing pressures from market signals, public services and party factions as it prepares its next major fiscal statement.