Rachel Reeves, the new Chancellor of the Exchequer, is under the microscope. After recently announcing a historic, Labour-style increase in public spending, she is going to pay for it mainly by hitting British businesses and employers with huge tax increases. This follows a very difficult period which has been characterised by extreme high-levels of pressure since last Autumn Budget.
As we witnessed at a recent House of Commons debate, tempers flared. The tears pouring down Reeves’ face reflected just how serious she was about the growing obstacles she faces. The market response was sharp, with UK bond yields jumping and the pound collapsing against the dollar and euro. Speculation swirled that Reeves could be on the verge of losing her position or resigning, especially following a lack of support from Prime Minister Keir Starmer during a question and answer session in the House of Commons.
The second striking aspect of Reeves’ proposed public investment plan is its ambition – and not just to improve the delivery of vital government services. She also set out two important fiscal rules designed to re-establish fiscal control over the UK’s vast and increasing debt and borrowing. The first of those rules states that annual government spending shall be fully funded by tax revenues, without borrowing. The second rule is that public debt must decrease as a share of economic output. This reduction must be realized by the fiscal year 2029-30.
These initiatives are laudable, but Reeves has an uphill battle. To add to his troubles, he needs to find further savings from a reversal of yet another government U-turn on disability benefits. Experts are concerned that she risks violating her own borrowing rules or contradicting Labour’s campaign promises by potentially imposing tax increases on workers later this year.
Simon Pittaway, an economic analyst, emphasized the gravity of the situation:
“When it comes to the next Autumn Budget, whoever the chancellor is, they’ll have some really difficult decisions to make. And I think, as far as we’re concerned, sticking to the existing fiscal rules is really crucial, that’s a move that would signal kind of credibility and confidence to the market.”
He proposed that this will need to be through a combination of increased taxes and decreased spending as the federal government moves along.
The distress shown by Reeves during the parliamentary debate illustrates the weight of her responsibilities and the challenging landscape ahead. Following recent upheavals in government policy, including changes to welfare spending, Wilson remarked on the precarious state of government strategy:
“Financially, economically, there’s very little that they can do, and Rachel Reeves has such a tough job on her hands now, finding the extra money without resorting to other actions that are going to upset the markets, including borrowing more or tax rises, so, really, I think the government left in an absolute bind here.”
Speculators are watching these moves very closely. As some have pointed out, there will be “plenty of eyes on the U.K.” as they judge the long-term effect on future economic stability.
“The nature of what’s happened over the last 48 hours, with the government’s welfare bill being torn up, it means that the government’s political and economic strategy are in absolute dire straits at the moment.”
Traders are closely monitoring these developments, with many indicating that there are “a lot of eyes on the U.K.” as they assess the implications for future economic stability.