An off-mic exchange towards the end of Rachel Reeves’s economic spring statement on Wednesday captured the mood in the House of Commons.
Britain’s chancellor of the exchequer had just announced a £14 billion (€16.8 billion) package of brutal spending cuts to shore up the UK’s ailing finances, including reductions in disability benefits and foreign aid. She appeared to blame some of Britain’s ills on the nervy atmosphere in the global economy.
“The world is changing,” said Reeves as she resolved to stick to tough fiscal rules on current spending, no matter the pain it caused.
The retort from the opposition benches was immediate.
“Labour is changing,” said Stephen Flynn, the leader in Westminster of the Scottish National Party. His contempt for the cuts imposed by the chancellor carried across the floor of the chamber to the ears of the chancellor as she spoke at the dais. Reeves looked up momentarily, before continuing.
She didn’t say it, but Reeves might have been happy to agree with Flynn that Labour had changed. The party under Keir Starmer won election last July partly on a promise to bring discipline to Britain’s public finances. The old Labour under Jeremy Corbyn would never have stomached such swingeing cuts for some of Britain’s poorest households. Even the UK government’s own estimates this week suggested the disability cuts alone could push 50,000 British children into relative poverty.
Yet Reeves was unmoved, adamant that she would stick rigidly to the rule she introduced when she took over at the treasury last summer: that Britain will eliminate borrowing for current spending by the end of the current parliament in the financial year from 2029 to 2030.
The scene was different when Reeves, Britain’s first woman chancellor, delivered her maiden budget last October. Then, she stunned the House of Commons with a £40 billion borrow-and-spend bonanza to repair Britain’s stuttering public services and invest in infrastructure for long-term gain.
Yet the £9.9 billion fiscal headroom that she had left herself last October was rapidly out by this week by puny economic growth – the OBR halved its growth forecast for the current year to just 1 per cent on Wednesday. Without higher taxes, which Labour had promised not to implement, or more cuts, the OBR said the UK would instead slip to a current deficit of £4.4 billion.
So this week, barely five months after introducing Britain’s most expansive budget in 30 years, Reeves chose instead to swing her axe to restore precisely the same £9.9 billion surplus headroom that she had allowed for last October. The Tories insisted she was forced into this week’s cuts due to the dampening effect of the tax rises, such as national insurance hikes, in her October budget.
Either way, Labour has now effectively bet the farm, and its prospects at the next election, on sparking hitherto-elusive economic growth in the years ahead. Britain’s national debt and its tax burden are both near historic highs. Growth is the only card that Reeves has left to play.
The problem for the chancellor, and for Britain, is that storm clouds are gathering on the economic front. As US president Donald Trump gets ready to unleash a global trade war next week with hikes in import tariffs, Labour’s aim to oversee a “decade of national renewal” is in real peril.
As well as high debt and taxes, Britain’s faces a growth challenge that is also of historic proportions. According to the left-leaning think tank the Resolution Foundation, Britain’s economic growth in the first half of this decade is “set to be the weakest of any comparable period in a century”.
In the noughties the UK’s cumulative growth rate was 11 per cent while even in the straitened 2010s – book-ended by austerity and Brexit – it came in at 7 per cent. In the 1980s it was 6 per cent and in the 1970s, it was 12 per cent. So far in the 2020s, the cumulative growth rate has been -1 per cent. That number illustrates Reeves’s pressing need to cut as well as any other.
Painful reductions in disability benefits and foreign aid, now a reality instead of a threatened prospect, have wrought anxiety on Labour’s heaving backbenches. It was visible in the on MPs in the House of Commons on Wednesday.
MPs are usually experts in the art of the supportive, agreeable nod – when a senior cabinet members speaks to deliver hard truths to the British public, many backbenchers nod along performatively and in rhythm. It was noticeable from the press gallery on Wednesday, however, just how few of Reeves’s Labour colleagues were doing their usual nodding as she tried to justify the cuts.
One wavering backbencher, Clive Lewis, would later tell Sky News that the cuts were “not what we expected” from Labour. “We have to look at alternatives [to more cuts], he said, to give Labour a “fighting chance.”
“I’m struggling to see how we can go into the next election saying ‘we make your lives better,‘” said Lewis.
After sitting solemnly through much of her speech on Wednesday, many Labour backbenchers found their voice towards the end when she made the surprise announcement that despite cutting forecasts for the year ahead, the OBR had actually raised its growth estimates for the years ahead.
Growth would be 1.9 per cent next year, the OBR said, marginally ahead of the 1.8 per cent it had predicted last October. In 2027 and 2028, it predicted growth of 1.8 per cent and 1.7 per cent, ahead of the 1.5 per cent it had previously estimated. Not Tiger economy rates, but still welcome.
Spencer Livermore, a peer who is also financial secretary to the Treasury, was keen after Reeves’s speech to play up what he optimistically claimed was Britain’s emerging “growth story”. The UK was predicted to have the second highest growth in the G7 in 2025, he said, while the UK was ranked second as an investment location by global chief executives surveyed by Price Waterhouse Coopers.
“That’s the first time we have been second in those rankings in 30 years,” he said.
How might Britain grow its economy in the years ahead?
Infrastructure projects such as building a third runway at Heathrow airport were among the economic enablers touted by Reeves during her speech on Wednesday, although that particular project could take more than a decade to bear fruit. Reeves also promised that Labour would turn Britain into a “defence industry superpower” in our new age of angsty geopolitics, through the manufacture of weapons in regional cities such as Glasgow in Scotland and Newport in Wales.
The bulk of the growth coveted by the chancellor, however, would be sprung from three wells.
The first is increased domestic demand. Labour insisted that people would be “an average of £500 better off” under the party by the end of the parliament, even though the Resolution Foundation predicted that the poorest households would be worse off by the same amount.
Wages in Britain have been rising faster than the rate of inflation in recent times, giving British workers their first real wage growth in years. Labour hopes a nascent feelgood factor will creep in before the next election, sparking consumer demand.
The second motor of Labour’s growth plan comprises its aim to build 1.5 million homes by the end of the current parliament. The average required of 300,000 new homes per year would surpass every building boom in Britain since the 1970s, and many in the construction industry fear the UK doesn’t have enough bricks, timber or manpower to sustain such activity.
But it has had some success already. Planning reforms being pushed through by the UK’s pugnacious deputy prime minister, Angela Rayner, have already been credited by the OBR for being responsible for a future 0.2 per cent rise in GDP – both the chancellor and Livermore claimed that the policy would create the biggest payback for any other ‘free’ policy in history.
The third plank of Reeves’s plan for growth is to strike trade deals, principally with the European Union – Labour wants to improve the Brexit trade terms negotiated by Boris Johnson – and with Trump’s US, where Starmer seeks a UK carve out on the tariffs that look set to roil Europe’s economy.
The OBR was explicit this week on the precise risk posed by Trump’s policies. The watchdog said that if he goes ahead with 20 per cent hikes in import taxes, it could almost immediately wipe the full £9.9 billion of fiscal headroom the chancellor carved out this week, forcing her into even more painful cuts or tax rises. It would also knock up to 1 per cent off growth, destroying Labour’s plans.
After Reeves’s speech, her spokesman denied at a briefing that the chancellor and her party had no “Plan B” to cope with the tariffs. Talks were ongoing, he said, and would bear fruit. Meanwhile, analysts suggested the chancellor’s headroom would be wiped out, leading to months of speculation ahead of the next budget in October about how she might plug the gap.
“The June spending review will be where the chancellor’s tighter spending plans crystallise into specific choices and start bumping up against reality, and her cabinet colleagues,” said Paul Johnson, director of the Institute for Fiscal Studies.
“We might be in for another blockbuster Autumn budget. What the chancellor has all but guaranteed is another six months of damaging speculation and uncertainty over tax policy.”
Goodbody Stockbrokers in Dublin said the chancellor was “walking a fiscal tightrope”. The firm also drew attention to the challenge the UK faces in financing its yawning national debt, with interest rates remaining stubbornly high.
The British-Irish Chamber of Commerce lauded the chancellor’s efforts to maintain “fiscal prudence” amid an intensely challenging economic backdrop. The organisation’s deputy director, Paul Lynam, said he was concerned, however, about “ongoing risks to UK productivity and the impact of costs employed on employers such as the rise in national insurance”.
For British-Irish trade, at least, the future seems somewhat brighter.
“While UK trade volumes globally are projected to grow by just 0.8 per cent annually over the course of this [UK] government, we are more optimistic about the strength of the British-Irish trading relationship. In a recent survey of our members, 92 per cent expressed a positive or very positive outlook for UK–Ireland trade, and 58 per cent indicated plans to increase their cross-Border business over the next 12 months,” said Lynam.
Reeves, meanwhile, will take whatever good news she can get while insisting that her way of tough love is the right way to restore Britain’s economic stability.
On Thursday, as the dust settled on her slasher spring statement, she responded to criticism about the impact on the poor. She insisted that her actions, such as changes to eligibility for disability benefits, were not about pushing people into poverty, but about lifting them out of it.
“Instead of pushing people into poverty, [we] are going to get people into work. And we know that if you move from welfare into work, you are much less likely to be in poverty,” she told Sky News.
Labour’s leadership argues the party has, indeed, changed. Whether it can succeed in bringing Britain’s economic fortunes with it by spurring economic growth will decide the next election.
