Steering the British economy out of the mess Labour inherited is a slow and painful process, beset by economic and political hazards. Four Labour governments since the Second World War were derailed by financial crises – in 1949, 1967, 1976 and 2008 – and two Tory governments by crises in 1992 and 2022. Yet, in 2025, Britain is arguably economically more vulnerable than in any of those years. The task for the chancellor is to climb out of this deep pit with as much determination as possible while not risking a sterling or bond sell-off that would derail the government, party and country at least as severely as any of those earlier crises.
Thus the much-criticised fiscal rules. These are not a self-imposed straitjacket to be abandoned at will but an attempted firewall to sustain financial market confidence while allowing scope to maintain and increase public investment. The promise to balance day-to-day public spending five years hence with day-to-day tax receipts is a minimum guarantor of fiscal credibility. But meeting this permits a second rule: to allow the state to borrow to maintain and increase capital spending, so protecting public investment from being raided as the soft option when the public budget comes under pressure – as every chancellor has done for more than 50 years, with results we live with daily.
Rachel Reeves has received a hail of brickbats for her spring statement, but strategically she has got a great deal right. Exploiting the fiscal rules, she is consolidating the increase in public investment announced last October and raising it further. This, together with planning reforms that the Office for Budget Responsibility recognises will ignite more housebuilding, will underpin an upturn in economic growth. It will also reinvigorate the public capital stock, extending from hospitals to decarbonising the housing stock – recognised by the OBR as enhancing growth. There are acute risks posed to world trade, growth, inflation and interest rates as President Donald Trump is set to launch his self-defeating “liberation day” next Wednesday – a salvo of 25% import tariffs on car, steel, aluminium, pharmaceuticals and semiconductor chips from any country he deems to be taking advantage of the US. The threat makes it all the more important that the UK can maintain and increase its levels of public investment, now high in historical terms, to offset the likely damage.
But the associated borrowing will be met calmly by the markets if the government hits its first fiscal rule, which was threatened this spring by economic underperformance, ballooning debt interest payments and an explosion of health-related welfare benefits that, unchecked, would have risen very close to matching education spending by 2029. The government was right to try to constrain this growth. No society, however rich, can countenance allowing spending on those with disabilities to grow so much it crowds out other crucial areas of spending. What of social care? Special educational needs? Defence? Social housing? Apprenticeships? International aid? Prisons? The court system? The more than 6 million people living on paltry universal credit? Supporting economic growth? Although there is a powerful case for increasing taxation on propertied and wealthy people, it is less clear that all the additional proceeds should be wholly earmarked for one category of the population. Unpalatable as it may be, the growth had to be slowed down.
But here the chancellor and her Treasury ministers lost their moral and political compass. To hit 3.2 million already disadvantaged and stressed households so they lose an average of £1,720 a year by 2029 (on the government’s own figures), and plunge 250,000 extra people into poverty, with only the scantest of compensating measures to help them into work, is a capital error. Some potential helpful measures were hinted at – a promised £1bn back-to-work scheme (with no details) and the pledge that sickness benefit claimants can retain their benefit if they work – but it was paltry. The range of Gordon Brown’s New Deals for work cost about £3bn in 2025 prices; a similar range of programmes – to incentivise employers to hire people with disabilities and mental health challenges while offering support and financial reward to re-engage with work – would be at least as expensive. Instead, we have an exercise in budgetary and PR management in which some of the weakest in our society bore the brunt. This was not tough love to assuage Reform voters, as some Labour MPs comfort themselves: it was an amoral abdication of responsibility to some of the most vulnerable.
Recognising this reality, the chancellor needed additional resources. Thus, the second capital error: to abjure any attempt to raise revenue in innovative ways. There would, for example, be wide support for creating a national defence fund, financed by 50-year bonds – with the debt service costs covered by a national defence levy averaging, say, 1% of income but structured so the well-off paid proportionately more. It would be a double whammy: finding the resource to raise defence spending to 3% of GDP earlier than 2029 and at the same time freeing the rest of the government from debilitating cuts to accommodate more on defence. And sooner or later, a chancellor of some political hue must reform regressive, low-yielding council tax. This is a Rubicon that must be crossed. There is a successful economic strategy potentially in the making, but the government needs to avoid the unforced capital errors of last week – and get on the front foot.
