The great Reeves rebalancing act
Rachel Reeves’ first Budget offers either a blurred vision of Labour’s economic outlook—or perhaps proves that Labour’s vision is itself blurred. What we received was largely as expected: the widely signalled £40bn tax raid includes rises in inheritance tax, VAT on private school fees, capital gains tax, and — by far the largest item — employers’ National Insurance payments.
This surge of revenue is channelled towards the public sector, above all NHS funding, enhanced support for special educational needs, and commitments to rebuild deteriorating schools. Infrastructure projects, such as HS2 and the Trans-Pennine rail upgrade, are in the mix, with £5bn towards affordable housing. Green energy also gets a nod, along with substantial backing for science and innovation. It’s largely in line with Labour’s manifesto, so I’ll leave others to unpick the details.
More interestingly, I think Reeves’ budget will be judged across four tests: immediate market reactions, short-term consumer confidence, medium-term growth strategy, and long-term structural rebalancing. Each test will reveal whether Labour’s economic strategy can stabilise, stimulate, and reimagine the UK economy—or simply offer stability without transformation. And let’s be clear: the UK needs stability, but that stability must lead to something transformative.
The lesson from Liz Truss’s brief premiership remains seared into the political psyche: her September 2022 mini-budget unleashed financial mayhem, failing spectacularly to reassure investors. Gilt yields spiked, government credibility plunged, and Truss was famously outlasted by a lettuce. Reeves has carefully navigated the opposite path, her approach distinctly cautious. By telegraphing tax increases, she’s avoided the seismic shock that toppled Truss. But at what cost? This barrage of bad fiscal news has been anticipated for so long that nearly every measure of UK economic confidence has sagged. Labour’s management of expectations, it seems, has effectively dampened any glimmer of optimism. The overall impression? A fiscal strategy managed by Bagpuss.
For months, Reeves has carefully flagged substantial tax increases while keeping a close eye on the markets. The payoff appears to be there: gilt yields have started to decline as Reeves outlines her new “stability rules”. Her projections suggest the UK deficit could shrink sharply by 2025/26, potentially reaching 2.1% of GDP by the end of Labour’s forecasted period—a stark contrast to the growing deficits anticipated in the US and parts of Europe.
If the first test of market reaction seems to have been passed, the second will come from consumer confidence as we head into the crucial Christmas season. Retail giants like Tesco and Next will report in January, offering insight into whether Reeves’ policies have buoyed or subdued spending. History here is telling: the infamous 2012 “omnishambles” budget from George Osborne—the one with the “pasty tax”—alienated the public almost overnight, a reminder of how swiftly fiscal policy can undermine consumer confidence.
If Christmas sales hold strong, it may suggest Reeves has managed to retain consumer confidence, a promising indicator for short-term economic health. If, however, shoppers hold back, it could signal that Labour’s “tough decisions” have squeezed household budgets too far. This “Christmas test” will serve as a litmus test for Labour’s broader economic aims, showing whether Reeves’ budget stirs public optimism or stifles it.
The more substantial and medium-term judgment will rest on Reeves’ “Securonomics” actually delivering growth. Yet here, the broader economic picture remains muted. The Office for Budget Responsibility (OBR) forecasts UK GDP growth to peak at a modest 2% in 2025, tapering to 1.6% by 2029—well short of Labour’s ambitious campaign promises. For £40bn in tax hikes, it’s not much to show.
Labour’s framework purports to blend fiscal responsibility with aspirations for resilience and stability. Reeves’ approach draws some comparisons to Gordon Brown’s 1997 budget, which granted the Bank of England independence and introduced fiscal rules. Brown’s strategy initially spurred growth, though it ultimately funnelled gains into London’s financial sector, reinforcing the “London bubble”, while regional growth took a back seat. When the 2008 financial crisis hit, this model came spectacularly undone, and the UK economy has arguably never fully recovered.
Reeves faces a challenge to avoid these same pitfalls. So far, she has sidestepped rather than addressed these issues. While her tax adjustments could lay the groundwork for stability, true reform will require the comprehensive industrial strategy Labour plans to unveil in the spring. Until then, “Securonomics” is light on the details needed to drive meaningful, nationwide growth; for now, it’s little more than a well-managed tax raid. Labour’s long-term objective should be to create a more inclusive, balanced economy where regional growth is integral to national prosperity.
To succeed, Labour will have to address the rampant asset inflation of recent years, while pushing for wage and productivity growth to catch up. This cannot be achieved through tax and spend alone; it will require visionary thinking.
Despite one of the most extensive and well-orchestrated tax raids in recent memory, Reeves has yet to confront the asset-wage imbalance or reliance on a London-centric services economy. Without policies to address these structural issues, Labour risks reinforcing, rather than reimagining, the UK’s economic limitations. Failure to tackle these issues will leave the UK vulnerable to future shocks, caught in a cycle of financialised, asset-driven growth that does little to improve wages or foster resilience.
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