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When Rachel Reeves became Chancellor last summer, the biggest issue facing her was the existence (disputed by the Tories) of a £22bn black hole in the public finances.
The political pain of cutting the winter fuel allowance was deemed necessary to balance the books and give the new government a clean sheet of paper on which to set out its agenda for economic growth. That, at least, was the theory.
Since then, things have gone from bad to worse for the Chancellor, and much of the mess is of her own making.
The run-up to the Budget was characterised by dire warnings of tough choices and pain ahead, and businesses took note; pausing investment and delaying decisions. Growth was being choked off long before Reeves delivered last October’s Budget, which contained an eye-watering amount of new taxes and additional costs imposed on employers up and down the country.
Growth flatlined as 2024 came to an end and a new optimistic, pro-growth tone of voice from ministers in the new year barely had time to register before Donald Trump set about upending global trade, playing havoc with markets, supply chains and inflation.
As the Chancellor touches down in Washington for the IMF’s summit of finance ministers, she finds herself in a precarious and unenviable position, with economic growth now forecast to evaporate this year, something the IMF attributes more to UK policy decisions than anything unleashed by Trump.
The UK’s public finances are in a dangerously weak position – buckling under the combination of low growth, high inflation, depressed business confidence (yesterday’s PMI numbers were truly grim) and a set of fiscal rules from which Starmer cannot possibly extricate himself without firing a Chancellor whose credibility was staked on adhering to those “ironclad” rules.
Public borrowing is running way ahead of forecasts and many economists and analysts now fully expect another tax-raising budget later this year, with VAT in the crosshairs and possibly even income tax.
Only a new Chancellor could unveil such a package, given how many times the current one has ruled out doing so, but tax increases won’t revive the economy.
Instead, they would lead to a catastrophic doom-loop of low growth and higher borrowing. We need more than a change of Chancellor; we need an urgent change of course and a genuinely pro-growth policy intervention that recognises the urgency of the situation.
