Economic growth is flatlining, the pound is down, gilt yields are up, borrowing costs continue to rise — and Liz Truss is claiming total vindication in her war with the media-economic-political establishment. The bad news continues to pile up for chancellor Rachel Reeves.
Increases in the cost of borrowing in recent days are reported to have wiped out the chancellor’s narrow £9.9 billion headroom against her goal of balancing the books by the end of the parliament. Reeves and her Treasury deputy Darren Jones insist that this pass-fail fiscal rule is “non-negotiable”.
Meanwhile, ministers continue to face protests from those hit hardest by the budget’s £40 billion worth of tax rises. Taking rearguard action against further backlash, Reeves ruled out additional hikes late last year. She told the Confederation of British Industry (CBI) conference in November that she would not be “coming back” for more.
Jones, the chief secretary to the Treasury, has since doubled down. In an urgent question on market jitters last week, Conservative MP Wendy Morton asked the Treasury deputy to recommit to Reeves’ vow. “Will he stand by the chancellor’s comment that she won’t come back with more tax increases?”, Morton asked.
“The answer is yes”, replied Jones.
Reeves’ hands are also tied, rather more significantly, by her manifesto commitments. During the election campaign, Labour pledged that it would “not increase taxes on working people”, and explicitly ruled out national insurance, income tax and VAT rises in those terms.
The bottom line is this: tax hikes are off the table for the foreseeable future, and Reeves is running out of fiscal remedies that are not labelled “spending cuts”.
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Recent market moves reflect several factors, not least of all escalating financier anxiety over a second Donald Trump presidency. But by leaving such little headroom in her budget — the leeway between the government’s fiscal rules and spending/tax plans — the “iron chancellor” was playing a dangerous game.
Politically, the risks Reeves ran at the autumn budget reflected the key tension that underpins Labour’s project in government — a tension that now looks sharper than ever.
The quintessential Labour pitch, which Reeves rehearsed relentlessly during the election campaign, is that Britain is broken and requires fundamental change. That argument rang true for enough voters in July that they either opted to back Labour or, crucially, refused to back the Conservatives. But Labour’s argument was caveated by its fiscal oaths, designed to restrain the party’s reputational deficiencies on the economy and tax and spend in particular.
Keir Starmer campaigned his party into a corner. The resultant “credibility trap” — whereby Labour’s tax promises and fiscal rules in effect rendered its “change” mantra incredible — defined its woes ahead of the autumn budget. Or, as The Economist’s Duncan Robinson put it: “The more credible you appear [on fiscal policy], the less credible you sound [on change].”
When confronted with this dilemma in opposition, Labour’s answer was always economic growth. Growth would see government revenue rise within the current fiscal framework, and so arm ministers with the funds to “change” Britain.
But economic growth hasn’t gotten Starmer out of jail yet. Stagnation, instead, has magnified his fiscal woes. That explains his enthusiasm for artificial intelligence and technological innovation in his speech today — when, in opposition, Labour once pressed the case for stronger regulation.
At the autumn budget, Reeves confronted Labour’s “credibility trap” head-on. Declaring her intention to “invest, invest, invest”, she announced plans to raise taxes by £40 billion and borrowing by £30 billion to fund £76 billion worth of new public spending. An extra £22 billion a year was dedicated to day-to-day NHS running costs, with another £3 billion for capital investment.
The autumn budget was a profound statement of intent: it identified “change” as the centre of Labour’s mandate. That was the determinative choice that defined Reeves’ other budget choices. Taxes were raised and borrowing increased (just about within the party’s manifesto strictures) to realise Labour’s lead pledge.
But Reeves’ audacious attempt to escape her credibility trap has only tightened her constraints. The chancellor’s headroom has narrowed — as has her room for manoeuvre on tax, thanks to recent pledges. The increases in interest rates, meanwhile, decrease her scope for borrowing.
The result will be spending cuts. That is the fiscal calculation — the logic of which is, unfortunately for Labour, compelling. Asked about the upcoming spending review after his AI speech, Starmer responded: “We will be ruthless, as we have been ruthless in the decisions that we’ve taken so far. We’ve got clear fiscal rules, and we’re going to keep to those fiscal rules.”
But what about the political calculation? Starmer and Reeves have promised they will not return to austerity — the autumn budget signalled Labour’s intent to make good on that pledge. Labour MPs, after all, did not get into politics to wave through spending cuts; that is not the party’s brand or mission.
And the spending cuts Reeves has announced so far, against the grain of Labour’s reputation and expectations, have been deeply controversial. The winter fuel payments cut, unveiled on the eve of parliament’s summer recess last July, exacerbated tensions in Westminster and went down disastrously beyond. For months, it was Labour’s defining predicament — and a self-inflicted one at that.
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The cut was intended to signal a readiness to take tough decisions — both to markets and Labour MPs. But the public backlash was immense. It eroded Reeves’ reputation among the Labour parliamentary party and, some anonymous briefings suggest, No 10’s political operation.
If Reeves is now forced into further spending cuts, the question will not be whether they cause internal friction — but to what extent. The government is far weaker politically than it was at the time of its winter fuel decision. Labour MPs who might have loyally stayed shtum then, could well see things differently now.
The chancellor has made mistakes. But most of all, she has made too many promises. She has pledged that her fiscal rules are “non-negotiable”; that Labour would not touch income tax, VAT or national insurance (on “working people”) in government; that, following the autumn budget, Labour would not be “coming back with more borrowing or more taxes”; that there will be no return to austerity; and, above all, that Labour will “change” Britain.
In Labour’s hierarchy of vows, “change” features highest. But these pledges, when viewed in full, are not pulling in the same direction. At worst, they are in conflict.
At the autumn budget, Reeves navigated these promises — delicately and riskily. And so Labour’s economic agenda remains brittle; the fiscal equation looks increasingly unbalanced. A reckoning, Westminster concludes, looms — potentially at the spending review, some form of emergency intervention or at the autumn budget.
Reeves, once seen as indispensable to the Starmer project, is viewed by some as the common denominator of Labour’s travails. This morning, chancellor of the Duchy of Lancaster Pat McFadden was asked if he thought the chancellor would survive until the autumn. “Yes, I do”, he replied.
This afternoon, Starmer refused to confirm whether Reeves will still be chancellor by the end of the parliament. Further mistakes could lift Starmer’s subtext into the foreground.
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