Week in Business: Will Starmer sack Rachel Reeves?
Cracks are appearing in the government’s economic policy – some made by ministers, others by external pressure – the question is, can Rachel Reeves stay in control – and does Keir Starmer want her to?
It’s never a good sign when a senior cabinet minister appears unaware of a major announcement on their patch, yet this is the position in which the Chancellor appeared to find herself on Wednesday.
As she toured a factory or a warehouse or somewhere requiring a high-vis jacket, she was asked about rumours of a possible u-turn on the controversial cuts to winter fuel payments.
She said “that policy stands” – adding “it was necessary to stabilise the public finances.”
And remember, that was the line, repeated incessantly by ministers as justification for the cuts.
Commons Leader Lucy Powell said the cuts prevented “a run on the pound” while transport secretary Heid Alexander said if they hadn’t taken the axe to a universal pensioner benefit we’d have seen “the sort of chaos we saw under the Liz Truss government.”
But – just hours after the Chancellor said “that policy stands” the PM was on his feet in the Commons, standing it down.
‘Toxic’ winter fuel cuts
There’s no doubt that the issue became completely toxic for Labour and it’s been a major contributing factor to their dismal poll ratings and their local election and by-election drubbing; it’s what people bring up when you ask them what they think of Labour.
So, a review is underway, though details are scarce and there’s no sense yet as to how they will re-evaluate it, when it will take effect or where the money comes from.
Starmer said the government was able to review the policy because the economy is growing. It’s a bold move to pin the u-turn on a strengthening economy when most economists expect first quarter growth of 0.7 per cent to be something of a one off.
What’s more, data this week revealed that the public finances are in a pretty shoddy state – further eating away at what little fiscal headroom the Chancellor had left herself ahead of the autumn Budget.
The government borrowed £20.2bn in April of this year mostly due to higher spending commitments in the form of public sector pay and of course debt repayments.
The Office for National Statistics said government borrowing in the financial year 2024/25 was £148.7bn – £11bn more than the OBR had forecast.
It’s not pretty. Economists say the latest public borrowing figures mean the Chancellor’s fiscal headroom has been reduced to a mere £6bn – a rounding error in government expenditure.
Tax hikes on the cards?
Ruth Gregory of Capital Economics said that if the Chancellor wants to stick to her fiscal rules “more tax hikes in the autumn Budget will be required” – a position shared by most analysts.
This brings us back to Rachel Reeves.
She has described her fiscal rules as “iron clad” – and has repeatedly said that the £40bn tax raid from her first Budget was a one off, never to be repeated.
With MPs in her own party having successfully pressured No 10 into a winter fuel u-turn, they’re likely to now turn their attention to other welfare cuts that so many on the left found unpalatable.
Plus, the government will have to convince MPs that their upcoming Spending Review – where departmental budgets are likely to be slashed – is necessary.
Does Starmer have the nerve to see this through? His biographer, Tom Baldwin, told Times Radio this week that the PM isn’t the kind of politician who says “this is what I stand for.”
You can read this as either compliment or criticism.
Either the PM is a ruthless pragmatist who changes direction when he deems it necessary, or he’s simply flapping in the wind, unbothered by conviction or principle.
I think the Chancellor’s fate depends on which of these two descriptions fits Starmer.
‘Ironclad’ fiscal rules
If he sticks to his mantra of tough decisions then Rachel Reeves remains a necessary part of that argument. But, if he thinks things have changed – the economy, the world, Reform’s surge in the polls – and he wants to loosen the purse strings, he won’t be able to do it under a Chancellor whose credibility – such as it is – has been forged by making the case to stick to the painful fiscal rules and make tough spending decisions.
In that context, it isn’t hard to see a scenario where Starmer thanks Reeves for her service, credits her with saving the economy in the first year of a Labour government – she’s cleaned up the Tory mess, reassured the markets, done a great job – and then moves her into the Foreign Office.
Of course, the only reason for doing this would be to pave the way for abandoning the fiscal rules, borrowing more and cooking up punishing new tax rises – examples of which have handily made their way into the public domain via a memo written by Angela Rayner, the deputy prime minister, in which she suggested a whole host of tax rises on savers, pensions, shares and banks.
So, in light of the alternative, I very much hope that Rachel Reeves remains in post.
The alternative would turn the government’s poor record on economic growth into a catastrophically high-risk experiment driven by even harder high-spend and high-tax instincts.
So, odd as it may seem, consider this the launch of a Save Reeves campaign.