Labour's new confusion

Image - UK Gov

This article was originally published on Jun 7, 2025.

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Rachel Reeves, the Chancellor of the Exchequer, is facing mounting criticism as her government’s economic policies appear to unravel less than a year into office. In a move that was initially touted as a demonstration of fiscal discipline, Reeves announced cuts to winter fuel payments nearly a year ago—an action that was intended to display Labour’s commitment to economic responsibility. The cuts were part of a broader strategy to restore economic stability, with No 11 at the time emphasising the importance of proving Labour’s competence to both the bond market and voters.

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Economic experts, including Paul Johnson from the Institute for Fiscal Studies, endorsed the cuts as “sensible,” framing the decision as necessary to strengthen the economy. At the time, the message from Downing Street was clear: the government was making tough choices to secure long-term economic growth.

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However, this message is now being undermined by a series of policy reversals. After facing significant pressure, Reeves announced a backtrack on the winter fuel payment cuts, which accounted for just 0.05% of GDP—£1.4 billion. This decision raises serious questions about the government’s ability to follow through on its fiscal agenda. Despite holding a large majority of 165 seats and being in office for less than a year, the government has struggled to implement even modest austerity measures.

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The government has sought to justify this shift by citing recent positive economic indicators, including a 0.7% growth in the first quarter of the year. Prime Minister Keir Starmer has suggested that the UK is turning a corner economically, pointing to the growth, four interest rate cuts, and new trade deals as signs of progress. Yet, debt remains a significant concern, with national debt now standing at 95.5% of GDP, up 0.7% from the previous year.

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In response, Chancellor Reeves has imposed real-terms spending cuts on unprotected government departments. Key figures within Labour, including Angela Rayner and Yvette Cooper, are still negotiating their budgets with Reeves. During a press conference, Reeves acknowledged that there were “good things I’ve had to say no to,” but the decision to prioritize fiscal restraint has raised concerns within her party.

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Critics argue that the government’s economic message has become increasingly contradictory. Upon taking office, Labour made clear that short-term sacrifices would lead to long-term gains. Starmer himself warned that “things will get worse before they get better.” Reeves also asserted that “if we cannot afford it, we cannot do it,” an inversion of Keynes’ famous line, “Anything we can actually do, we can afford.”

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However, as the government walks back key austerity measures—such as the winter fuel payment cuts—it risks confusing voters. While it can afford to reverse certain cuts and honor election promises on tax, it is unable to prevent further departmental reductions or fully commit to spending on defense, despite Starmer’s rhetoric about the UK’s “war-fighting readiness.”

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As the government heads toward the autumn budget, it will need to raise taxes, with the only question being how much. Some political insiders believe that Reeves’ failure to raise income tax, VAT, or National Insurance on employees could ultimately be seen as a fundamental error, leaving the government reliant on smaller, often controversial measures to generate revenue.

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The bigger issue, however, is the lack of clarity over Reeves’ long-term economic vision. Her approach so far has included elements of all three major economic strategies: austerity, anti-austerity policies, and growth-oriented risk-taking. But without a clear identity or consistent direction, critics warn that her economic policies could ultimately be perceived as incoherent.

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As Labour grapples with the contradictions in its economic approach, the question remains: What kind of Chancellor does Rachel Reeves want to be?