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Rachel Reeves is safe – but now she’ll have Keir Starmer breathing down her neck

The prime minister will be taking more notice of activity in the Treasury from now on. And, writes Andrew Grice, if Reeves cannot deliver the higher growth on which Labour’s entire strategy hinges in two or three years, Starmer’s ruthless streak might be on display once again.

Wednesday 15 January 2025 12:00 GMT
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Rachel Reeves defends trip to China amid market turmoil

Rachel Reeves came out fighting in a confident first Commons appearance since the turmoil on the bond markets and today’s unexpected slight drop in inflation to 2.5 per cent boosted the chances of the Bank of England cutting interest rates next month. But despite this good news, the chancellor is not out of the woods yet.

As well as trying to reassure jittery markets, Reeves will come under greater scrutiny very close to home – from her next-door neighbour in Downing Street.

After July’s election, Keir Starmer was happy to sub-contract economic policy to Reeves. Whitehall officials were alarmed that there was so little pushback from No 10 and that Starmer did not engage in last October’s Budget process until very late in the day. Now, even loyalist LabourMPs privately accept that Reeves made mistakes: means-testing the pensioners’ winter fuel allowance (a deliberate show of steel for the markets); delaying the Budget until almost four months after the election; overdoing the economic gloom, which eroded business and consumer confidence; and a £25bn rise in employers’ national insurance contributions, allowing business to blame all their unpopular decisions on jobs and investment on the Budget.

One problem, blamed on Starmer’s former chief of staff Sue Gray, was that No 10 was, as an insider put it, “downsized and downskilled”. Unlike his predecessors, Starmer lacked his own economic adviser or senior officials with Treasury experience and so was unable to inject some politics into Treasury orthodoxy.

Belatedly, the prime minister has begun to put this right and to live up to his title as first lord of the Treasury. He has just appointed two former Treasury officials to key posts: Olaf Henricson-Bell as director of the Downing Street policy unit and Michael Ellam, who spent 18 years at the Treasury, as his EU negotiator. (Henricson-Bell is the almost identical twin brother of newbie Labour MP Torsten Bell, promoted to pensions minister following Tulip Siddiq’s resignation, raising the prospect of total confusion for other participants when the policy unit holds a meeting on pensions).

One Starmer ally told me: “There’s now a recognition Keir can’t be chairman of the board, which was his instinct after the election. The PM has got to be a hands-on chief executive.” Ministers, previously surprised Starmer did not steal their announcements for himself, now grumble privately that he is cherry-picking them. Normal service has resumed.

It has already been an eventful year for Keir Starmer and Rachel Reeves
It has already been an eventful year for Keir Starmer and Rachel Reeves (PA)

Although Starmer will now watch Reeves’s decisions more closely, they still enjoy a good working relationship. Her allies are relaxed about closer cooperation with No 10. They insist she is “tough” and “will stay the course” for the five-year parliament but Downing Street’s pledge that will happen is not bankable. If she cannot deliver the higher growth on which Labour’s entire strategy hinges in two or three years, Starmer’s ruthless streak might be on display once again.

If the Office for Budget Responsibility’s (OBR) spring forecast on 26 March says higher government borrowing costs mean Reeves will not meet her fiscal rules, she will cut spending rather than increase public borrowing or raise taxes again. But she would have a massive problem selling what would look like austerity 2.0 to her party. Ministers are already warning the Treasury they will be unable to meet Labour’s manifesto commitments and Labour backbenchers want to increase state benefits by ending the two-child limit, rather than cut spending on them for the sick and disabled, which is now on the cards. Some MPs fear a “fiscal doom loop” of cuts and even lower growth, requiring even more cuts. They would prefer more tax increases but significant rises would destroy Reeves’s reputation as she has presented the Budget’s £40bn hike as a one-off.

True, Reeves is mainly a victim of global headwinds blowing from America, but even Labour loyalists fret that her Budget left her open to market turbulence. The chancellor might be reluctant to cut her short-term spending plans because the increase in departmental budgets this year and next should boost demand and thus growth. So she might promise a squeeze in the final two years of the five-year parliament to meet her fiscal rules in the hope growth makes it unnecessary when the time comes. The problem is that overall spending then is already going to be very tight, rising by only 1.3 per cent in real terms.

The chancellor would probably prefer to delay any cuts until her government-wide spending review in June or this autumn’s Budget to avoid headlines about an “emergency mini-Budget” in March. That would invite comparisons with Liz Truss, even though the Starmer-Reeves version would not be in the same league. (In 2022, gilt yields rose by about 2.5 percentage points, compared to 0.7 points since last year’s election. Today, yields are close to the 4.75 per cent bank rate but in the Truss meltdown were about three points higher).

However, the markets might yet force Reeves to act in March, earlier than she would wish. As one City analyst told me: “The bond markets are not sure about her Budget numbers. They will keep pushing her until she does something. When they scent blood, it’s dangerous.”

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