Time will tell whether this week’s spring statement enables Chancellor of the Exchequer, Rachel Reeves, successfully to reset the UK government’s economic strategy.
Few commentators predicted the torrid baptism of fire that has beset the Labour administration after it was swept into office with a landslide victory less than nine months ago. Indeed, when diarised late last year, this set-piece parliamentary presentation had initially been intended as a routine and insubstantial update on fiscal and monetary strategy. Domestic economic headwinds and the broader geopolitical turbulence represented by the second coming of Donald Trump means it has taken on far greater significance in the financial and political markets.
Putting to one side the impact of the US President’s demand that in-year costs of NATO defence be met more equitably, it has been the backdrop of soaring borrowing costs that has led to an ever-gloomier narrative of further tightening in Whitehall and local government budgets. The UK’s situation remains notably fragile as in recent months yields on our long-term government debt have reached higher levels than in comparable nations; all the more reason for relatively orthodox policy making if the UK is to retain the confidence of our ever-growing roster of international creditors. Investors have already been disquieted by the manner in which taxes were raised in last autumn’s budget, a fact that will not have been lost on the Treasury. Essentially Reeves’ budget decisions last October have left her with no room for manoeuvre if her (admittedly self-imposed) stability rule – requiring all day-to-day expenditure to be met from government revenues – is to be followed without another round of spending cuts or further tax rises.
These events have been a salutary lesson of the pitfalls that come with the creation of structural constraints in Opposition that attempt to convince voters and the capital markets that you can be trusted with the keys to the Treasury. Doubly so – as it had been crystal clear even as 2024 dawned that the UK’s post-lockdown recovery, such as it was, had been built on the shakiest of foundations with renewed inflation and at best stagnant productivity. Government expenditure meanwhile had continued apace with the emergency increase in levels of welfare spending made in 2020-21 proving very difficult to tame, yet alone reverse.
The very fact that so little in the statement came as a surprise – normally there is at least one unexpected rabbit that a Chancellor pulls out of the hat – reflects on how limited Rachel Reeves’ options were. Certainly, when it comes to clamping down on public spending, unless the axe comes down radically on the ‘Big Two’, healthcare and social security, it really is an exercise in whistling in the wind.
For so long as sustained economic growth continues to elude the UK, government will be constrained in its expenditure plans. This is always hugely challenging for centre-left administrations. To many of their MPs and party members unequivocal support for the least well off in society lies at the very heart of their political belief. Even the relatively modest reductions in worklessness benefits have provoked a major parliamentary rebellion. But unless the UK economy returns to healthy levels of growth it is difficult to see how the government will not need before long to return this agenda and bear down further on the welfare budget. This explains the almost messianic push by the Treasury to make economic growth and competitiveness part of the mandate for regulators, which had previously seen their mission as driven by consumer protection, standards enforcement and market stability.
Less attention has been paid – for now, at least – to the inflationary pressures that threaten to upset much economic forecasting in the years ahead. The OBR predicts a glidepath towards meeting the 2% target in 2027 that I regard as unwarrantedly optimistic. In the aftermath of further quantitative easing during the pandemic it is clear that keeping inflation to recent historic lows will be far more of a challenge than in the past. History also records that inflationary spirals and their close-cousin, wage-price spirals – have a tendency to take hold extremely quickly. Incidentally this is why the outgoing Conservative government was so determined to concede little ground to any of the striking public sector workers in the array of recent protracted industrial disputes.
A little perspective is useful here. It was just over fifty years ago, in the first few months of 1973, inflation in the UK stood at 6.5 per cent, only a little higher than the then 4 per cent level in West Germany, whose economic success we then hoped to emulate by joining the EEC. Yet within two years UK inflation levels had reached the unprecedented heights of 26 per cent, whilst Germany’s remained in low single digits. The sharp increases in world energy prices, as a consequence of the last major conflict in the Middle East in 1973-4 impacted comparably on the then UK and German manufacturing economies (this was in the era just before North Sea Oil came on tap). However, organised labour in Germany worked in tandem with its government, realising there would have to be a short-term fall in living standards, rather than pushing for large wage hikes. Britain’s trade unions took the opposite course and the more powerful were able to threaten, and implement, strike action. Costs of production rose, further inflation resulted, and ever larger pay claims quickly became the norm – those living on fixed incomes or in occupations lacking industrial muscle, lost ground, and living standards across the board plummeted. Does any of this seem familiar?
Those who criticise Treasury orthodoxy also need to reflect that its institutionalised memory is now the single most important element in ensuring that policymakers avoid a repeat of this grim outturn during the 1970s that some of us are just about old enough to remember. Keir Starmer and Rachel Reeves have quickly realised that a painful fiscal reckoning is now upon us. The cost of government borrowing will become even more expensive in the years ahead, so like it or not battening down the hatches on public spending has become essential as bond market yields rise.
In truth none of the options that faced Rachel Reeves this week was especially palatable. Having invested much in promoting her self-image as an Iron Chancellor, tinkering with the mandate of the Office of Budget Responsibility or her stability rule, which express firm targets within a range and over a rolling period, was always going to be difficult. Likewise moving the goalposts for the Spending Review to ease her commitment to specific departmental spending allocations, especially in areas of spending normally regarded as non-priority and unprotected.
The problem here is that geopolitical events have a tiresome way of catching up on even the most resolute of finance ministers. The defence and international aid budgets, for example, are now regarded as on the front-line of our essential national security; but more money found here only increases the acute pressure on capital budgets for infrastructure projects across other parts of the public realm. All well and good to delay the school repairs and road building programmes today, but we know full well that this will only lead to a far more challenging situation in the UK’s infrastructure by the 2030s. A stitch in time saving nine and all that.
Finally, amidst the hullabaloo that inevitably surrounds set-piece statements of this sort, it is always worth reflecting on the dogs that didn’t bark. Never under-estimate the extent to which government Ministers and their advisors, governed by a five-year electoral cycle, hold firm to the Micawber principle that ‘something will turn up’ in times of trouble. In real life as well as politics, doing nothing and waiting on events is sometimes the road best taken. The government’s fiscal rules may be ‘non-negotiable’ but there are some rather heroic assumptions made about growth that suggest the Chancellor’s tax increases on business, announced last October and about to come into effect, may prove to be no more than an initial down payment. Watch this space!
With the benefit of hindsight some warning signs were already there even on election night last July. The vagaries of the UK’s first past the post electoral system – and almost unprecedented levels of tactical voting as electors unsentimentally ousted the four-term Conservative government – meant that Labour’s landslide was secured on the back of a national vote share more commonly achieved by a losing party. For this reason, the new Labour government began life strangely lacking in confidence; until forced to confront the need to increase defence spending, it often appeared torn between its self-image as a party of radical change and a constant fear in almost every policy announcement that it is alienating its support base. Genuinely reforming governments are confident of their instincts and firm support of ‘their people’; think back to the administrations of Margaret Thatcher and Tony Blair – or a little further afield, to the second terms of Bill Clinton and, as we now see playing out, Donald J. Trump.
Written on 26 March 2025 by The Rt Hon Mark Field, former Member of Parliament (MP) for Cities of London and Westminster and Consultant at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.