Rachel Reeves must now tell us when things are going to get better

Editorial: While stewarding a faltering economy beset by structural problems and battered by formidable global headwinds, the chancellor can no longer afford to ignore the politics of her unpopular measures

Having generated such a handsome amount of political capital from the chaotic failure of the last Conservative government to manage the public finances, it must be doubly galling for Rachel Reeves to be faced with her own fiscal crisis – and disobliging headlines about market turbulence – so soon in her own chancellorship.

It would be grossly unfair, not to say wildly inaccurate, to compare what is happening now with the disastrous Liz Truss mini-Budget; the similarities are superficial. Yet the outlook for sterling and the future course of interest rates is not encouraging.

The same, it must be added, may be said about Ms Reeves’s personal ratings and those of the Labour government. The consensus among economists is that, on current trends, something will have to give. The cost of servicing the UK national debt – amounting to some £2.7 trillion and rising – has risen so much that it means that Ms Reeves will either have to break her “iron-clad” fiscal rules, raise taxes again, cut public spending plans, or some permutation of all three.

Downing Street says the fiscal rules, albeit recently amended, are “non-negotiable”. If so, and given the reaction to the hike in employers’ national insurance contributions and the “tractor tax”, the most likely outcome will be something that will feel very much like austerity in the public sector, especially in social security.

The danger for this still-young administration is that the conclusion drawn by the electorate about those who lead them will be as bleak as the present verdict offered by the financial markets. The government’s position is not yet irrecoverable, but political recovery will be dependent on, and just as difficult as, achieving economic progress.

It’s fair to point out that the declining appetite for government debt, which is pushing interest rates higher, is not confined to the UK. It is a more-or-less global phenomenon, driven by the imminent return of Donald J Trump to the White House.

Despite the president-elect’s windy assertions to the contrary, tariffs will drive US inflation up, and trade wars with Canada, the European Union and China will depress world trade, investment and growth. That will hurt the ability of every government to raise, from taxation or borrowing, the revenues needed for infrastructure investment and to maintain public services.

In truth, the vast debt overhangs accumulated by all the G7 nations – during the great financial crisis of 2008, the peak of the Covid pandemic, and the energy crisis engendered by Russia’s invasion of Ukraine – will take decades to clear. However, it is equally right to understand that the UK has had to deal with especial factors – a longer-term, stubborn problem with poor productivity, and the baleful and continuing consequences of Brexit.

As an unusually open economy, the UK can ill afford new restrictions in its trade with the United States while it is still struggling with barriers to European commerce. The diplomatic tasks are no less onerous than their economic and domestic political counterparts.

Some months ago, Ms Reeves was offered some wise advice by her former boss and mentor at the Bank of England, ex-governor Mervyn King. Lord King suggested, inter alia, that she “create a narrative that links the justification of higher investment to the reform of public services ... and a credible path from the debt-to-GDP ratio”.

As the former governor, and a distinguished economist, he might agree that this is easier said than done. Yet the chancellorship is essentially a political role, in the way that that of a central banker or an economic adviser is not, and it is the creation of this “narrative” by Ms Reeves and Sir Keir Starmer that remains wanting.

Indeed, Ms Reeves’s earliest decisions – on cutting the pensioners’ winter fuel allowance and on the Budget itself – were presented with an astonishing lack of nuance and clarity. It does not have to be this way.

Though the politics of Britain’s first female chancellor could hardly be more divergent from those of its first female prime minister, these are very similar to the challenges that faced Margaret Thatcher when she came to power in 1979. She and her chancellor, Geoffrey Howe, encountered similarly formidable structural problems with the economy and the public finances.

Thatcher’s administration was also extremely unpopular in its first months – and for a time, things, especially unemployment, went in the wrong direction. Yet the message was consistent. At that time, winning the war on inflation was – despite the pain – the prerequisite for recovery, and the route would be via improved productivity and competitiveness.

Six months into the life of this new Labour government, it has made clear that it inherited a “black hole”, and that getting the public finances onto a sustainable footing is essential. The past as prologue, though, is only half the narrative. The British people are still unclear about how and when living standards are going to improve, and when their public services are to be restored.

“Britain is broken” was a powerful slogan during Labour’s election campaign – and the nation responded. It would like to be given some confidence, now, that things are being fixed.