There is mounting pressure on Rachel Reeves to relax her budget rules and to prepare the ground by telling voters in the next few weeks.
The latest public borrowing figures for April, which show a rise above most City forecasts, indicate that the chancellor will struggle to stay within the constraints she imposed on herself at last year’s budget.
Reeves gambled that the Treasury could brazen out a difficult year with nearly £10bn of headroom – a cushion that would protect the government against all eventualities.
Donald Trump’s tariffs war and the subsequent global slowdown have been enough to derail that tactic.
Economic growth is expected to slow over the next year despite a spate of trade deals. Inflation is rising, hitting household incomes and pushing up the costs of public services.
A £10bn cushion over a five-year time horizon was always optimistic. Now it looks like being in jeopardy even after the Office for National Statistics said revisions of past estimates means it overestimated last year’s debt by £4bn.
No 10 is adding to Reeves’s problems now Keir Starmer has made clear he views the winter fuel allowance cut as a mistake. It’s possible he has many other unpopular measures in his sights.
There was better news from a rise in tax receipts linked to the increase in employer national insurance contributions and the freeze on income tax thresholds, which has brought more people into higher rates of tax.
They gave the Treasury a lift, according to April’s figures, but not enough to override the extra spending needed to compensate public bodies for higher wage bills and the costs of inflation on department running costs.
Next month’s departmental spending review will set aside funds for lots of long-term projects designed to raise the UK’s skill levels, bring more people back into the workforce and boost productivity. As a potential reboot, it holds the prospect of lifting the nation’s spirits. The impact, though, will be circumscribed by the need to keep the overall plan within tight spending limits.
Another problem for Reeves can be found in the reaction from businesses. They are making their own assessment of the public finances and the tension between the people-pleasing Starmer and the iron chancellor.
They know more concessions from No 10 will make the likelihood of higher taxes on business more likely in the autumn. If there is a budget gap to fill, company bosses sense they are being viewed as a cash cow that can be endlessly milked.
Their reaction is already clear; apart from a few industries such as construction, where the government has shown a sense of direction, most businesses are hunkering down, cutting staff and cancelling job adverts.
Yet the Treasury knows that another round of tax rises, whether on businesses or households, will be a growth killer, delaying a move through the economic gears promised when Labour took office.
The National Institute of Economic and Social Research has long argued that constraining budget rules have forced successive chancellors to make bad, short-term decisions in an effort to squeeze through each annual budget.
That is the prospect Reeves faces now.
The thinktank favours bringing down debt, but after a period of public investment has sparked a rise in tax receipts. It also argues, like many do, that cuts to welfare at this moment will prove to be counter-productive.
To maintain investment and keep public services from falling backwards, there will need to be more cash on the table from the Treasury. That’s the growing view in the business community as well.
The public wants the economy to recover more than it wants fiscal rectitude, and while the financial markets are anxious about rising public debts, the scale of the modest easing needed in the UK will be dwarfed by what is going on in the US, where Trump is pushing for tax cuts that will raise US debt levels by more than $5tn (£3.7tn) by the end of the decade.
As messages go, there could not be a clearer one for the chancellor. A relaxation of the fiscal rules should not be delayed. Without it, the whole Labour project could be undermined.
