On Saturday Rachel Reeves will mark — ‘celebrate’, sadly, is the wrong word — the anniversary of her glass-ceiling-smashing appointment as the first female chancellor of the Exchequer in the 800-year history of the post.
There is unlikely to be much champagne flowing in the state room at 11 Downing Street or indeed the Chancellor’s grace-and-favour mansion at Dorneywood in Buckinghamshire.
Indeed judging by the tears that dramatically flowed in the Commons at Prime Minister’s Question Times today - the result of a “personal matter” according to her spokesman - Rachel Reeves could be forgiven for wishing she had never been offered the job.
When Keir Starmer failed to give his Chancellor his full backing in the Commons the bond markets took fright, fearing she could be replaced by a successor more to the liking of the rebellious back benches.
At one point the yield on ten year government bonds surged by as much as 22 basis points to around 4.68 per cent.
Possible replacements include Pat McFadden, Darren Jones, Jonathan Reynolds and Yvette Cooper although the Prime Minister later clarified that Reeves was “going nowhere” in words that soothed the markets.
It was all a deeply traumatic end to a remarkably bruising 12 months overshadowed by a largely disappointing UK economic performance, a debut Budget that shattered Labour’s pre-election hopes to succeed the exhausted Tories as the “party of business” and now, increasingly, of humbling U-turns.
Entrepreneur Luke Johnson, whose investments have included Gail’s and Pizza Express, told the Standard he rated her first-year performance as a one out of ten.
He said: “The mood among the investors, entrepreneurs and business leaders I talk to is close to despair about the prospects for the UK and the leadership of the Government. The National Insurance increases combined with the employment rights bills and the net zero agenda have had a impact on confidence that is close to catastrophic.”
It was not supposed to be this way. The MP for Leeds West and Pudsey, boorishly dismissed as “Rachel from accounts” by some of her more sneery critics, entered the Treasury on July 5 2024 on a wave of post-landslide euphoria.
After the Brexit years of Conservative chaos did so much to tarnish the UK plc brand globally here was a chance for a Labour administration with a solid 174-seat majority to rebuild Britain’s reputation as a beacon of stability. But if there is a “how to” handbook for incoming chancellors, Reeves appears not to have read it.
Reeves made four calls that perhaps showed her inexperience and were to dog much of her first year
Certainly the chapters titled “Do not talk down the economy” and “If you make a tough spending decision to impress the markets, for goodness sake stick to it” have been ignored.
In her first set-piece Commons statement, on the “public spending inheritance” less than a month after her appointment, Reeves made four calls that perhaps showed her inexperience and were to dog much of her first year.
Firstly, on the advice of her political team, she tore into the record of her predecessor Jeremy Hunt as she attacked “the worst inheritance since the Second World War”. It was a message repeated ad nauseum over the following weeks that disastrously sapped what little confidence had been building in the economy.
Secondly, she set the date of her first Budget as October 30, some 117 days after the surprise snap election called in the London rain by Rishi Sunak. That was the longest wait for a first Budget from an incoming administration for more than half a century. In the interval, the Chancellor’s doomy rhetoric was allowed to fester and, not surprisingly, growth over the summer slowed dramatically.
Thirdly, she announced she was settling the disputes with public sector workers that had dogged the previous Tory administration. The resulting above inflation public sector wage hikes added £9.4 billion to the Government’s pay bill, dangerously increasing the burden on the nation’s tottering finances.
Fourthly, Reeves revealed the fateful — now largely reversed — “difficult decision” to axe the Winter Fuel Payment to all but the poorest pensioners. It was a “courageous” shout — in the language of Yes, Minister mandarin Sir Humphrey Appleby — that sowed the seeds for the breakdown in relations with the Labour backbenches that threatens to wreak such havoc with her plans to stabilise public finances.
But markets loved the show of force from an “Iron Chancellor” and by early September the yield on the benchmark 10-year gilt fell to a reassuringly low 3.75 per cent. Yet Reeves could not hold the line on Winter Fuel Payments and a volte-face was knocked up — an outcome “bond vigilantes” who destroyed Liz Truss’s ill-fated administration noted and tucked away.
By the time the Budget did come around in October the outlook was already gloomier with consumer confidence back on the floor, growth stalled and the Chancellor’s boss Keir Starmer warning the public of “painful” choices.
With Reeves boxed in by Labour’s election pledge not to increase rates of income tax, National Insurance or VAT on voters, she loaded the revenue-raising burden on businesses with the now-notorious hikes in employer NIC rates that kicked in on April 6.
As Thomas Pugh, UK economist at accountancy and consulting firm RSM put it: “Raising taxes through employer NICs is one of the worst ways you can do it from an economic point of view. Maybe not quite the worst — but well up there.”
It is too early to say exactly how bad the fall-out will be from the £25 billion raid, but the omens are not good. The number of payroll jobs fell by 109,000 in May alone, suggesting businesses are shedding labour on a huge scale to offset the worst of the NICs hike.
Meanwhile, the promised sunlit uplands of faster growth appear as shrouded in cloud as ever. The Office for Budget Responsibility (OBR) — which draws up the forecasts the Chancellor relies on — only expects 1 per cent this year. It is not enough to generate the tax revenues the Chancellor needs for the commitments she is obliged to fund — particularly after the climbdown on welfare cuts — while keeping within her fiscal rules.
With public borrowing set to top £148 billion this year, the bond markets the UK entirely relies on to keep the wheels of government turning are watching recent developments in British politics — and biding their time.
Some in the City say she could have used Donald Trump’s arrival as an excuse for a radical change of direction
The UK already pays a higher rate of interest on its public debt than almost any major country in Europe, with the 10-year gilt yield currently bobbling around the 4.5 per cent mark. The former Eurozone basket cases of the 2011 debt crisis, such as Greece and Ireland, pay just 3.3 per cent and 2.9 per cent respectively. Interest on Britain’s debt will total around £115bn this year, while the welfare bill is likely to rise by £50bn to close to £380bn by 2030. These are not sustainable figures.
As RSM’s Pugh puts it, the messages given off by the recent climbdown on welfare reform “is firstly to backbenchers that ‘if you make enough fuss you can get the Government to U-turn’ and to the markets, ‘you can’t trust any promises on spending discipline in the future’.”
According to some in the City, Reeves could have used the arrival of Donald Trump on the scene to cover a radical change of direction.
For Paul Dales, chief UK economist at forecasters Capital Economics, there was a “missed opportunity at the start of the year when it was really clear the UK was going to have to spend more on defence. It should have been taken as an opportunity for a reset when she could have said, ‘The world has changed, we all need to play our part and that benefits all of us.’ She could have changed the fiscal rules or raised money from a broader realm.”
“That could have meant a penny on the basic rate of income tax to pay for the extra tanks and missiles. As one City economist put it, “you can justify it economically, after all being invaded by Russia is not likely to be good for productivity.”
Where commentators give Reeves higher marks is in her commitment to longer-term upgrades to public investment in the NHS, affordable housing and infrastructure, and the Industrial Strategy published last month.
Reeves is walking a high wire fiscal tightrope
That is certainly building the foundations for a more productive and faster growing UK over the decades and generations to come.
But current voters will not thank the Chancellor for that, or remain loyal to a Labour government promising jam in the 2030s but thin gruel for the next four or five years.
Reeves is walking a high wire fiscal tightrope trying to balance the conflicting demands of her restless backbenchers and the heartless gilt markets. She cannot keep them all happy and is arguably only one misstep away from a surge in gilt yields that could presage a full blown financial crisis. We know what that feels like from the brief but intense meltdown after the September 2022 mini-Budget in the Truss era.
A widely expected downgrade of the OBR’s forecast of productivity growth will give even less wiggle room come the autumn Budget and more taxes, probably in the shape of a further extension to income tax threshold freezes, are almost certainly on the agenda.
It is wing and a prayer stuff. Certainly not at all what the first female chancellor would have hoped for when she walked smiling into 11 Downing Street just a year ago.
