The Game's Up: Why It's Time For A New Chancellor

The recent chaos caused by the additional debt burden facing the UK has highlighted not only inadequate economic planning by the Chancellor but a wider pattern of poor decision making by the Labour Party leadership.

Starmer went all in on Reeves being able to deliver a fiscal plan that could turn the tide of stagnation and deliver much needed growth to the UK economy. Yet instead of seizing the opportunity for a fresh economic outlook, the Chancellor boxed herself in, offering the Treasury very little headroom. It looks increasingly likely that she won’t be able to keep her promise to balance day-to-day spending with tax receipts in 2029. It may also be difficult for her to stick to her promise to hold only one fiscal event a year, as the Spring Statement might be required to provide a more robust response to the economic environment once the OBR has released more data in March.

If she doesn’t adjust or entirely do away with these constraints it’s expected she will have to ask for more taxes (on top of the ones raised in the Autumn Budget) or she will have to increase borrowing so she doesn’t falter on her public spending commitments. Both would ultimately entail a U-turn and contradict her fiscal rules. This feeds into the larger issue of decision making; where the leadership in the government continues to box themselves in and refuses to adapt when circumstances change.

Reeves at the Dispatch Box yesterday (14/1/25)

Looking at the bigger picture: unless interest rates miraculously reverse, Starmer’s government is left helpless at the wheel of an economic vehicle that will be spending vast sums of money to finance extra borrowing. Fiscal targets won’t be met and subsequently we will see a rise in interest rates and investors backing out of the UK. Consequently resulting in higher interest payments by the government. Reeves put all her eggs in one basket by solely relying on growth to get the country moving again, a hugely damaging mistake.

This reliance on growth is a huge gamble that the markets don’t think will come off. Full Fact recently disproved Lisa Nandy’s claim that ‘The OECD is confident that we’re on track for the fastest growing economy in Europe’. Economic growth that would be sufficient to pay for Reeves' spending plans looks unlikely. To keep Labour’s manifesto promises Reeves would need to find £14bn by 2028/2029 according to the IFS. To avoid real term cuts to services she would need £30bn. There is no clear indication that economic growth in the UK would definitely be able to produce this, as nominal GDP growth forecasts appear to remain flat up to 2028/2029. New growth data released tomorrow could be make or break for the Chancellor.

It's important to look at specific Labour spending plans, for instance with the NHS. At the General Election Labour’s headline policies included promises to cut waiting lists with 40,000 more appointments every week, double the number of cancer scanners, a new Dentistry Rescue Plan, 8,500 additional mental health staff and to have a return of the family doctor. All good policies that should be implemented, but all requiring significant levels of investment. Yet the numbers simply don’t add up. When health inflation is running at least 3% higher than general inflation, where will Reeves find the money to pay for the NHS that the Labour government promised? Even though she claims that these investments are fully costed, the only way that she would be able to pay for it is through growth, which as I’ve said isn’t an argument that sits well with the markets.

Another issue facing the government is that they can’t significantly cut public spending as a method of damage limitation or as a way out of the issue. Yes they could cut specific budgets here and there to try and tighten the gap, as they did by cutting Latin from secondary schools, raising a measly sum of £4mn. But it would be political suicide for Reeves and this Labour Government to pursue an agenda of drastically cutting government budgets, for the accusation of implementing austerity could so easily be levelled. If Reeves did pursue the cutting budgets track, it would most likely be by reducing the day-to-day public service funding from 1.3% to 0.9%, which in real terms which would reduce public spending by around £9bn. Which might be enough to offset the impact of higher debt interest spending. However, following this course would undoubtedly cause uproar around the Cabinet Table. Plus internal Labour Party pressure, specifically from the left of the party would push Starmer to sack Reeves.

Starmer seems to constantly reiterate that things will get worse before they get better, and that sacrifices have to be made. Reeves has even noted that emergency spending cuts might have to be made. But these will not be enough to stave off the crisis for long.

Understandably, a lot of the issues Reeves is trying to tackle is due to the inheritance from the Conservatives and the global economic environment. I do acknowledge the extremely difficult job she is having to grapple with, but it is hard to not highlight how mistakes have been made at almost every turn. Reeves will also now have to deal with the Trump administration who will undoubtedly push for increased defence spending within NATO.

Starmer has come out and publicly backed Reeves, whilst Downing Street shared the view that she would be Chancellor for the entire Parliament. Yet many believe she will be out of the job by the end of the year. Starmer has left himself few ways out of an ever increasing economic hole and the political storm that it entails. He has set the stage for a run of significant U-turns that will hugely damage his credibility and that will provide huge impetus to a Conservative opposition trying to find its feet and a roaring Reform Party looking to build on its momentum.

So what’s the way out of this mess? Economically it looks difficult. Either taxes go up, public spending is cut sharply or borrowing goes up, the latter of which would further exacerbate the problem posed by the debt burden. All these would be extremely damaging politically to Starmer, Reeves and the Labour Government. The only other way out of the mess is through growth. Yet there is simply no clear indication that this is going to happen. To be so reliant on growth was an extremely foolish plan.

Starmer must do what is best for the country and sack the Chancellor. Her role is simply untenable. She single handedly backed the UK economy into a corner with no way out. A new Chancellor provides the opportunity for a new economic plan to be drawn up in time for the Spring Statement, where spending can be cut and some taxes raised. Although this will be painful, there is simply no other way out of the situation the Chancellor has put the economy into.

Ben Zaranko of the Institute for Fiscal Studies summed it up best in saying that the situation ‘reflects a series of government choices and mutually incompatible promises: to stick to a hard, numerical fiscal rule while leaving only the finest of margins against it; to prioritise public services and avoid imposing another round of austerity; not to raise the biggest taxes, and not to raise taxes again after the Autumn Budget; and to hold only one fiscal event per year’.

I do not intend this to appear as some sort of polemic against the current leadership of the Labour Party, but only to highlight the stark reality facing the country and economy. Reeves and Starmer have spent countless hours reiterating that they are a sensible and safe pair of hands for the economy, yet this has never seemed further from reality. Their economic plan is based more on uncertainties than certainties. Which is reinforced by the repeated decisions to box themselves in with specific rules where the only way out would be hugely costly U-turns. It’s important to remember that this government has never been in a strong position; only two in ten people voted for Starmer, so further economic turmoil could be disastrous. A new economic agenda should be implemented before the markets lose confidence in this government. Because as we have seen with previous governments, once the markets have decided they have lost all confidence, the game’s up.