Rachel Reeves, the new Chancellor of the Exchequer, is already under the magnifying glass. Now, as Budget 2025 approaches, accusations are flying that she deliberately misrepresented the government’s budgetary position. The Conservative Party even threatened Reeves. They claim that somehow she “misled” the public on the degree of the fiscal straightjacket the government is in. Most immediately, Prime Minister Keir Starmer finds himself in a cabinet of fragile leadership. As the row develops, further elections approach in Scotland, Wales and across much of England.
The recent Budget introduced very acute forecasts for real GDP growth and inflation. This has generated alarm bells to ring among the growing field of analysts and political party insiders. Further growth in spending power is expected to be weak due to a slow recovery of inflation above previous forecasts. All of these factors have the potential to drastically affect the federal government’s fiscal plans over the longer term. This is even more the case as state expenditures on welfare soar. More than one million privately employed direct support workers will gain access to income tax come 2024. Millions more will find themselves faced with higher tax liabilities.
There is a tough political climate to navigate right now. Little consolation for the Labour government’s narrow majority—won at the July 2024 snap election, which will likely soon be tested. The timing of some of these budgetary decisions has raised party eyebrows and skeptics even in party ranks. One senior figure questioned the rationale behind these moves, asking, “In terms of managing your party, why do it this week?” This sentiment underscores the rising tension within Labour as it navigates its fiscal path while attempting to maintain party unity.
Beyond the budget’s bottom-line figures, this debate has real ramifications for public trust and the economic future. Even optimistic predictions describe a dark future for any economic growth for the next several years. Indeed, as experts have warned, growth is likely to continue to trail projections through at least 2030. Increases to the federal minimum wage, especially combined with tax hikes as President Biden has proposed, analysts have warned would be the last straw on economic growth.
Given these complexities, there have been some reasonable cries from within the business community to give the law time, to be patient. One prominent business leader remarked on the potential for stability, stating, “Best-case scenario is this gives stability – the government can crack on, and we see an uptick [in the economy]. It’s not like other governments globally are smashing it.” Another business figure acknowledged the extraordinary nature of the tax increases while expressing a desire for a positive outcome from the Budget: “Twenty-six billion of extra tax is not normal, but I think the Budget will settle things down.”
All observers have not been so forgiving. A city insider pointedly noted, “All of the pre-election talk about being the party of business and growth was bullshit. Everyone recognizes that now and they won’t forget.” This latest critique embodies the developing irritation from constituents with Labour’s promises to create a pro-business climate.
Nervousness over welfare spending is increasing. Indeed, projections estimate that by the end of the decade almost £400 billion will be spent on pensions and welfare alone. A senior business figure voiced their concern, stating, “I think we are bit screwed aren’t we – by end of the decade we are going to spend nearly 400 billion on pensions and welfare – growth is clearly not at the top of the list.” Yet this sentiment belies a deeper fear – that Labour can’t square the circle between their anti-austerity welfare commitments and the economic growth would-be agenda.
As Labour continues to contend with these complex questions, the dynamics within the party are an important factor. Angela Rayner’s supporters have voiced concern over individual decisions taken alongside the Budget. They’re worried that these kinds of choices would place inappropriate and unsustainable pressure on Starmer and Reeves should economic conditions deteriorate after local elections.