Rachel Reeves was given a warning this month how the most carefully plotted budget strategy can be blown off track by turmoil in financial markets.

Calm has been restored, for the time being, but the lingering effect has been to increase the UK government’s cost of borrowing.

If higher interest rates persist, the chancellor could be forced to allocate more of her budget to debt interest payments and, to stay within borrowing constraints, raise taxes or make spending cuts.

Can Labour generate enough growth?

A reduction in government spending to fund higher debt payments will be a blow to Reeves, who is desperate to kickstart economic growth. However, Treasury cash is not the only spur to economic activity.

The IMF says in its latest health check on the UK economy that while government spending is important (and it approves of the chancellor’s mix of higher taxes, modestly higher borrowing to pay for a revamp of public services), most of the UK’s growth this year will come from consumer spending.

It said strong wage rises for the majority of workers over the last two years and several interest rate cuts by the Bank of England will improve household finances, giving consumers the confidence to spend again.

Inflation is beginning to come down again, unemployment remains low and the economy started to grow in November after a few months when it flatlined. Consumer confidence rose in December. So it looks like the economy is beginning to wake up after a long slumber. As a guide, IMF forecasts show the UK economy will expand by 1.6% this year compared with 0.8% in France and 0.3% in Germany.

Can Reeves cut without doing any damage?

As Labour’s former shadow chancellor John McDonnell has said, any reduction in spending takes money out of the economy. But how much this hits growth depends on the way ministers go about making cuts.

Much of the extra spending is allocated to investment in sectors that support the UK reaching net zero. This investment needs to remain in place. But if other projects are delayed or scrapped – the £10bn Dartford relief road, for instance, better known as the Lower Thames Crossing – then there would be little damage.

Whitehall insiders are keen for Keir Starmer to focus on the five missions in the Plan for Change. If Starmer and Reeves can retain the funds needed to build an “NHS fit for the future,” and in the process end hospital backlogs while also creating safer streets, improving skills training and apprenticeships and making “Britain a clean energy superpower” there will be a tangible lift to the UK’s capacity for growth.

Public sector pay restraint?

The government has offered 2.8% to all public sector workers, telling Whitehall mandarins the award applies to them as much as it does teachers. Unions are unhappy, arguing that average wages in the public sector remain below 2009 levels once inflation is taken into account. But Labour has already given many of the 5.7 million government workers – whose pay and pensions account for about 22% of public spending – a sizeable boost. Asking Reeves to reverse 15 years of austerity in two years is unreasonable. It may be that as inflation falls, the final settlement will be even lower.

Can it be done by tackling fraud?

All previous chancellors have promised to tackle the missing millions from the tax system, generating a degree of scepticism about how much difference further crackdowns can make. But HMRC is bringing in tens of billions of pounds following a series of crackdowns on avoidance and evasion under recent Tory administrations.

The latest analysis of official figures by City law firm Pinsent Masons shows tax investigations have brought in an extra £45.7bn in the year to June 2024, up 28% from £35.7bn in the previous year. Reeves has given HMRC top up funds to support further investigations. It looks like being a good investment.

Are any other tax rises possible?

Labour promised to avoid increases in income tax, employee national insurance and VAT. These are where the big sums can be found to boost public spending.

Chancellors this century have preferred to use stealth taxes on consumers, obscuring the damage to household incomes. For instance, the blame for higher home insurance premiums can be laid in part at George Osborne’s door following repeated increases in insurance premium tax (IPT).

Reeves prefers to look at the subsidies and tax breaks for individuals and businesses that look generous or outmoded, and can be withdrawn. This is a dangerous game, however, as shown by the decision to strip farmers of some inheritance tax benefits.