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It is fair to say that, dire economic inheritance or not, when the chancellor of the Exchequer delivered her Budget at the end of October, she did not expect a few months later to be facing the House of Commons to answer questions about a fiscal crisis.
Doubly galling, she finds herself and her policies compared unfavourably to Liz Truss.
Returning from a trade mission to Beijing that raised the relatively modest but useful sum of £600m of new investment for the UK, one of her more inventive critics on the Tory backbenchers teased her about her recent travels: “As the chancellor flew east, the pound plummeted south, and government debt rocketed north.”
Hyperbole, of course – but the fact is that sterling has indeed fallen to a 14-month low against the dollar, long-term borrowing costs are at a 27-year high, and, as a result, the national debt is costing an extra £12bn a year to service. Some two-thirds of the proceeds from the painful, and damaging, rise in employers’ national insurance contributions (NICs) will be swallowed up by debt interest – at the expense of public services.
It is no surprise that there is mounting speculation that Ms Reeves will have to take decisive action very soon to repair the public finances, again; and that that most likely means cuts to public spending plans and – even though politically toxic – further tax increases.
Ms Reeves tells her critics to “get real”, and points out that there has been a global trend to higher interest rates and mounting concern about inflation. True enough – but the UK has suffered more than most from these trends and, as an open economy dependent on trade and the kindness of strangers to lend it the funds on which it relies, is unusually vulnerable to such trends.
It is apparent that much of Ms Reeves’s predicament is of her own making, because of a critical failure of judgement. In her Budget last year, she did not build in sufficient fiscal “headroom” – a financial margin of safety – to ensure that her borrowing plans were sufficiently robust to withstand the kind of internal and external shocks that can afflict any economy.
Even at the time, it may be recalled, the market reaction to her Budget package was, at best, subdued, with the yields demanded by investors on British government debt starting to slowly edge up to the concerning levels at which they presently stand. Ms Reeves had few good options at the time, but she did make the dramatic choice to raise employers’ NICs to 15 per cent from April.
It was a move that rapidly drained both business and consumer confidence, depressed already subdued spending and investment, and poleaxed the very economic growth that she and the prime minister have placed at the centre of their ambitions. Other measures have also raised practical problems that have added to the sense that our soi-disant “Iron Chancellor” may not have the right mettle for the task.
The “tractor tax” represents another attack on an important business sector’s confidence, and, while the Office for Budget Responsibility (OBR) agrees that the abolition of non-dom tax status will raise up to £5bn a year, there are longer-term questions about how sustainable that will be if the footloose mega-rich choose to migrate to fiscally friendlier climes, taking their money with them.
There is a broader and deeply worrying sense here that all the careful work Labour did to gain the confidence of business before the election, for the sake of attracting investment and creating jobs, has now been squandered in what must feel to many to be something of a betrayal. The chair of the Confederation of British Industry, Rupert Soames, complains that business feels “bruised” and suggests that the Tory “black hole” has been superseded by a Labour black hole. This is not good for investment.
After all, these increases in taxes on business, much of which will be passed on to staff, were not even vaguely hinted at in the run-up to the election, just as there was no indication that the pensioners’ winter fuel allowance was to be restricted to the very poorest, let alone the tractor tax that has caused so much worry in rural communities.
Again, to be fair to Ms Reeves, there’s no doubt that her predecessors left behind completely unrealistic public spending and borrowing plans, and the “black hole” was real enough, though exacerbated by the government’s decision to fully fund pay rises for junior doctors and train drivers without commensurate guarantees about reforms and improved productivity.
Yet the decisions Ms Reeves has taken seem to be making matters worse, wiping out growth and satisfying precisely no one. Consumers, businesses, farmers and investors are all underwhelmed by the chancellor’s performance, to put things mildly.
For Labour, the bad news keeps on coming. On Monday, a grim new NHS record was reached when it was revealed that more than half a million A&E patients faced trolley waits of 12 hours or more, with the average waiting time up four hundredfold in a decade; one north London hospital is looking to recruit nurses to provide “corridor care”.
When Tulip Siddiq stepped down as anti-corruption minister and Treasury minister on Tuesday, she became Sir Keir Starmer’s second ministerial resignation in six months. To hammer home Labour’s unpopularity, its poll rating has slumped to a single point ahead of Reform UK.
If Ms Reeves is lucky, then signals from her about some judicious and manageable cuts to public spending in the forthcoming comprehensive spending review, with fiscal plans correspondingly adjusted in the right direction, will be sufficient to satisfy the OBR and investors, and at least ease the fiscal crisis.
Treasury sources express the hope – it can be no more than that – that when Donald Trump is installed as president, there will emerge some clarity about his plans for the federal budget, tariffs and economic wars with China and the European Union.
Fears about all those factors, to which the UK is vulnerable, have diminished confidence in recent weeks; but there is also a significant risk that President Trump will not moderate his language, and the concerns about the effect on UK exports to America and global inflation will intensify.
If they do, and if the latest inflation and growth figures disappoint, then the challenges facing Ms Reeves will multiply. To adapt Labour’s election theme song, things won’t necessarily get better.
