Chancellor Rachel Reeves does not present as one of life’s gamblers. Her proudest boast, curriculum vitae aside, is her “iron” determination to put Britain’s public finances on a sustainable footing.
Yet, as the latest report from the OECD shows, that objective has been far from fulfilled – and will become even more difficult to achieve, at least over the coming year or so.
The organisation’s downgraded UK growth forecasts – 1.3 per cent this year, and 1 per cent for 2026 – are miserable, and will do nothing to lift confidence among consumers and investors, nor banish the dismal mood in her party about its electoral prospects. For most people, there is no practical difference between living in an economy with such minimal expansion and one that is stagnant or in a mild recession.
Ms Reeves’s problem is that, fiscally speaking, she likes to live dangerously – or, at least, that is how things have turned out. She has never provided herself with sufficient leeway in meeting her self-imposed fiscal rules to withstand the kind of bad luck or more serious shocks to the economy that might come any chancellor’s way.
Such unfortunate developments have been all too frequent in her time in office, and that has led to a sort of perma-crisis over tax, spending and borrowing, with politically sensitive cuts to benefits adding to the sense of jeopardy.
Time and again, Reeves has created the thinnest of margins of error – about £10bn, in a spending total of around £1,300bn – and, time and again, it has been wiped out. Sometimes, that has been because of the usual vicissitudes, such as inflation proving more stubborn than usual, and elsewhere because of unpredictable events, most obviously Donald Trump’s gyrating attitude to tariffs.
But she has made her own mistakes, too. Cutting the pensioners’ winter fuel payment yielded minimal additional revenues for maximum electoral loss, and she placed too much emphasis on raising employers’ national insurance contributions, which appears to have had a more depressing effect than thought.
Her biggest gamble, however, has been in hoping that she could meet her fiscal rules by the absurdly small margins she allowed herself. The OECD recommends that the chancellor “steps up” her efforts to create a more comfortable buffer against adversity, and Ms Reeves would be as well to take their advice.
The comprehensive spending review next week is the best opportunity she will have on that side of the ledger to inspire confidence that she is indeed making the right kinds of tough choices – ones that protect the most vulnerable, as well as boosting growth. At the Budget in the autumn, she will have another chance to “kitchen-sink” the measures needed to avoid the periodic crises that have unnerved markets and so drained confidence in the government.
The OECD suggests a “balanced” approach: targeted spending cuts, including the closure of tax loopholes; revenue-raising measures such as re-evaluating council tax bands for the first time since they were introduced in 1991; and the removal of distortions in the tax system.
These reforms to taxation would probably mean a fairer and more rational system, and might thus make the economy a little more healthy. But the main effect must be to chart a medium-term fiscal strategy that markets can have confidence in, which provides room for the Bank of England to ease interest rates, and, at last, puts the government back in control of events, rather than being pushed around by them.
Few governments have foundered as swiftly as the Starmer administration, but that does not mean recovery, both economic and political, is impossible.
Far from it. This early in the parliament, and with such a substantial majority at the government’s disposal, Ms Reeves has a chance to put right the mistakes she made in her first months, and move beyond (rightly) chastising the Conservatives for their complacency and banging on about the notorious £22bn “black hole”. To borrow a phrase popular in government circles, she should have gone further and faster last year to sort the public finances out for the rest of the parliament.
The good news for her and her colleagues is that it is not too late to lay those firm fiscal foundations for growth. But this year, she should play safe, take more notice of the raw politics of her choices, and develop a more compelling narrative about the future rewards for prudence. It will be painful, but not as uncomfortable as watching another wager fail. She will indeed need an iron determination.
