Labour MPs are privately questioning whether the Chancellor may have to be replaced if the economic outlook does not improve for the UK in the coming weeks.
Pressure is mounting on Rachel Reeves to spell out how she will get the UK’s finances back under control amid growing Labour jitters over her handling of the economy.
Whitehall departments are braced for deeper cuts in spending, while ministers have been instructed to dig up more policies that could help fire growth into the flagging economy.
The cost of servicing UK debt has risen to highs not seen since the financial crisis in 2008 this week, threatening to wipe out the Chancellor’s thin £9.9bn headroom. The volatility in the gilt market is mainly because of the strong US economy and incoming Trump presidency, but Reeves is also accused of hemming herself in with her fiscal rules limiting her ability to respond.
In effect she has only two options to raise money if the headroom is wiped out – tax rises which she has said she won’t do, or cut spending.
Home Office sources told The i Paper that there were “definitely some challenging decisions ahead” when it came to spending as the Treasury places greater pressure on officials to find efficiencies.
Borrowing costs grew once again, while the value of the pound fell to a 13-month low against the US dollar, prompting traders to bet on just one interest rate cut in 2025. The shift in stance comes just months after analysts were hoping for as many as four rate cuts this year.
Higher interest rates risk wiping out Reeves’s fiscal breathing space and means she faces having to raise taxes or make deeper cuts to public spending if she is to meet her fiscal rule not to borrow for day-to-day spending.
MPs and government officials are expecting the Chancellor to announce more wide-ranging cuts in the spring after the Office for Budget Responsibility sets out its forecasts on 26 March, although it is unlikely she will spell out where the cuts will fall.
Ben Zaranko, associate director at the Institute for Fiscal Studies (IFS), said the Chancellor faces a “rather unenviable set of options”.
The economist said Reeves had compounded a “difficult fiscal inheritance” and “global economic factors” by sticking to a “hard, numerical fiscal rule while leaving only the finest of margins against it”.
“If higher interest rates wipe out her so-called ‘headroom’, something will have to give,” Zaranko added.
The predicament has for the first time led backbenchers to raise doubts as to whether she will remain in post as Sir Keir Starmer’s Chancellor.
“Unless she’s able to show that her plan is working, that growth will be coming from somewhere, then it might be that Keir has to make a decision. You can be sure it won’t be him taking responsibility for it,” one Labour MP told The i Paper.
The MP suggested Darren Jones could take on the job, Business Secretary Jonathan Reynolds or Chancellor of the Duchy of Lancaster Pat McFadden.
“A dour Scot in charge of the purse strings. We’ve had it before.”
Another Labour backbencher lamented the shift in mood within the business sector, adding that it was “sad” that the party had lost the sense of “energy” and “excitement” which it briefly had with business.
“We did lose that a bit in the Budget,” they said.
Pollsters have suggested that Reeves faces a “crucial next few weeks” as she battles to get a grip of the UK’s finances ahead of the OBR’s next official forecast on 26 march.
Luke Tryl, director of think tank More in Common, said up until now Starmer had been the Chancellor’s “human shield”, but added that there was a risk “she could start to become the focal point” for the public’s anger.
Chris Hopkins, director at Savanta, said that the Chancellor’s resolve to stay the course could break if public opinion continues to go against her, point out she has a net favourability score of -20.
“The party is betting on the long-term benefits of these tough decisions, hoping they will pay off in time for the next election. However, as scrutiny intensifies, Reeves may feel compelled to reconsider her approach to improve her personal standing with the electorate,” Hopkins said.
Asked on the News Agents podcast if the Budget had any role to play in the difficulties IFS director Paul Johnson said: “It’s really hard in the six months or so that the Government’s been in office to make a big difference to things. But I think there are three concerns I think the markets have that are specific to what’s happened.
“The first is that we are borrowing more than we were. The second is that the tax rises that there have been for employer national insurance, which creates some concerns about growth.
“And the third is that the fiscal rules that Rachel Reeves has set herself, she’s only just meeting, and I think there are worries about what happens next? Will that mean more tax rises?
“Will it mean reaching those fiscal rules? What would the politics be around spending cuts, if they had to be introduced.”
It comes as Reeves is under fire for travelling to China in a bid to forge stronger economic ties as part of her push to boost growth in the UK.
A former chancellor told The i Paper that they sympathised with her dilemma, adding: “I think it was an impossible call for Rachel Reeves. Terrible look to go but looks like panic to cancel.”
Downing Street strongly supported the decision, however, stating: “China is the world’s second largest economy, our fourth largest trading partner, and exports support nearly half a million UK jobs, it’s expected to be the biggest driver of growth this decade, from which there are growth opportunities that can benefit Britain.
“Finding a way to cooperate pragmatically to support growth while competing where we need to and challenging where we must, is in keeping with the consistent, strategic and long-term approach we’re taking to China.”
Liz Truss needs to take her own advice, and cease and desist