Rachel Reeves hosted a Downing Street bash for MPs, associates and children this week – part of her charm offensive to reassure colleagues and media that she is an accessible figure and not, as one glum backbencher put it, “a high tax, low spending, Waspi-women-bashing joy sponge”.
Much of a Chancellor’s role is about fronting up difficult news with fortitude. Despite having to kybosh hopes nurtured by Labour in opposition that 3.6 million women hit by changes to the state pension age could be compensated retrospectively, and an even wider backlash over the withdrawal of the winter fuel allowance, the Chancellor cuts a serene figure, albeit one whose smile has acquired a glued-on aspect.
It is a sign of underlying nervousness, despite the large Labour majority, on a number of scores. One becoming the primary focus is Reform UK’s surge under Nigel Farage and its outreach to disaffected working class voters who flocked back to Labour this year at the election. In an interview with The Guardian at the weekend, Reeves engaged with Farage’s criticisms, saying: “He has no idea on the biggest issue that matters to voters, which is tackling the cost of living crisis”
The net effect was to add to the “coronation” of the Reform UK leader as the de facto head of the opposition. Reality check: Farage is leader of a small insurgent party with a handful of MPs and a large megaphone. Being so high on the Chancellor’s verbal hit list is more useful to him than criticising Reform is to Labour. The line “he hasn’t a clue” will surely be wielded back at Reeves by Farage as the economic trials mount.
Putting that misstep aside, Reeves needs trust from colleagues that she can deliver; that is the currency most at risk as she rides into the poor outlook of early 2025.
When Keir Starmer came into office, Reeves traded on the reputation of being “Keir’s economic brain”, foregrounding her credentials as a former Bank of England economist repeatedly as a reason for voters to deem her the best steward of the economy. But Andrew Bailey, the Bank’s present governor, has made clear that he regards Reeves’s decision in the Budget to lower the level at which employers start paying the tax on employees’ income by just under half, to £5,000 a year, as a potential “impact” – which is governor-speak for “This one is on you, Chancellor.”
Many businesses believe that damage is already being felt as the “animal spirits’ of entrepreneurship languish and employers cut jobs or fail to hire. Pay rises for those in work to offset the cost of living troubles, plus higher employer outgoings in National Insurance, leave little appetite for hiring before 2025.
The biggest risk for Reeves as the year ends is that she becomes caught in a spiral of inflation, which remains stubbornly high, with scant signs of the growth Labour promised. Her Autumn Budget was intended to be a central recipe for improvement. But a party which preaches growth, holds a key event to deliver it and then delivers no sign of resuscitation quickly sheds confidence.
The Bank of England’s core mission to keep down inflation leaves Reeves in a position many Chancellors have chafed more openly about – the question of whether the Bank’s caution in leaving interest rates unchanged at 4.75 per cent, adding to pressure on mortgage holders and enterprises, is an over-reaction. But something has happened to the previous growth projection of 0.3 per cent, which buoyed Labour hopes only a month ago – and the obvious home-made event is Reeves’s own tax-raising budget.
The dangerous pattern for a new Chancellor is that her growth measures become jam-tomorrow “wait and see” pledges, which rely on large-scale changes like NHS improvement and changes to the welfare state to allow (or frankly prod) more people back into the workplace and raise productivity.
Reeves does know this and plans are afoot to reboot the “UK plc” narrative away from more tax raising and spending-slashing. She has invited Bailey on her trip to China to drum up support for UK trade with Beijing in January. And in fairness, for all those on the right who see her as a “growth killer” because of her insistence on tax rises to fund spending, she has also attracted ire from economists on the left for a proposed plan to water down financial services regulation. That is an attempt to make the UK a more attractive destination for capital across capital markets, fintech, sustainable finance, asset management and insurance businesses – the kind of “supply-side” reforms many Conservatives have advocated to “move the dial” on UK attractiveness.
2025 will see her produce a financial services strategy, strongly influenced by talking to investors about what puts them off the UK – all amid the prospect of a Wall Street boom as the new Trump administration loosens regulatory fetters in the US.
So the recipe is more nuanced than the headline “bad news” currently reflects: a reliance on bigger “plays”, including a controversial warm-up of economic ties with China, an EU-“reset” (which I fear is going nowhere fast) and measures to lure loose global capital to the UK. The longer-term fixes are a more encouraging prospect for chancellors to dwell on than short term anger or fatalism.
But the job is the hardest one in government when a fissile national mood turns glum; the Grinch everyone can declare to be to blame is the Chancellor – and there’s not much yo-ho-ho joy in that.
Anne McElvoy is executive editor at POLITICO and host of the Power Play podcast
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