The Challenge Ahead for Rachel Reeves and the Labour Party
When Rachel Reeves presented her first Budget as Chancellor, introducing £40 billion in tax increases, her message was clear: this was a temporary measure. In subsequent interviews, she assured the public, stating, “We don’t need to come back and ask for more.” However, as the Spring Statement approaches, both 10 Downing Street and the Treasury have begun to adopt a different tone—one that acknowledges a rapidly changing global landscape, leading to unpredictable circumstances. This could mean that Labour MPs may face an even harsher reality than they did with the recent Budget: significant spending cuts.
While Keir Starmer refrained from making bold proclamations during the 2024 general election campaign, he at least hinted that a Labour government would prioritize growth and increase funding for public services. Yet, as the year has progressed, it has become evident that Reeves is operating with less fiscal flexibility than she initially hoped.
The Chancellor faced a tumultuous start to the year as the gilt markets grew unstable, causing borrowing costs to rise. Recent revelations from the Office for Budget Responsibility indicate that Reeves’ anticipated £10 billion headroom has vanished. In government circles, this situation is unlikely to be framed as a problem solely for Reeves, despite Conservative attempts to position it that way. Instead, Treasury officials are pointing to the evolving global context. Allies of Reeves argue that since the election, three major factors have emerged, complicating the economic landscape in unforeseen ways:
- Global Security Concerns: Heightened tensions in various regions, including conflicts involving Trump, Israel, and Russia, have stifled worldwide economic growth.
- Increased Borrowing Costs: A significant global uptick in borrowing expenses has strained financial resources.
- Defense Spending Necessities: The prevailing insecurity, particularly in Europe, necessitates an increase in defense expenditures.
Reeves has communicated to her colleagues that it is crucial for the UK to be agile in responding to these challenges. “Rachel has been emphasizing that the world is evolving, but we are strong enough to adapt,” states one ally.
However, the question remains: how will the rest of the Labour Party react to the government’s planned adaptations? Reflecting on his experience as Chancellor, Nigel Lawson once provided insightful advice to George Osborne. When Osborne inquired how to convey to the Conservative Party that tax cuts aren’t always feasible, Lawson replied, “You don’t have to worry about Tories over tax cuts… What you have to worry about is their endless demands for more spending.” This relentless appetite for increased spending tends to resonate even more strongly among Labour MPs.
As the Spring Statement sets the course for the future, there are rising concerns about the subsequent major Treasury event: the Spending Review. Departments have been tasked with modeling various spending cuts, and government aides are already expressing their discontent. “It feels like a return to austerity,” warns an advisor from a non-protected department. Yet, in the Treasury, there is a vigorous pushback against such characterizations. “I would remind colleagues that £40 billion in tax translates to £40 billion more for public services,” asserts one insider.
Nonetheless, funding allocations will inevitably create winners and losers among departments. “We are prioritizing the NHS at the expense of everything else,” cautions a minister. For instance, if the Ministry of Justice is required to implement further savings, could Starmer inadvertently provide the Conservatives and Reform with an advantage on the pressing issue of crime? Ministers outside the government’s five central “missions” are the most likely to face cuts. There are also concerns that Ed Miliband could find his influence diminished, despite his leadership on a key mission focused on clean power.
“Several ministers responsible for the missions are underperforming,” reveals a government source. “Ed is genuinely effective, but ironically, his mission is one that some in No 10 would prefer to see scaled back.” This warning coincides with No 10 adopting a more blue Labour approach, responding to the rising threat from Reform.
The most challenging issue for garnering parliamentary support will likely be welfare. Historically, this has been the area where party whips are most anxious about potential backbench rebellions. A recent vote on the two-child benefit cap resulted in some left-leaning MPs losing the whip. If Liz Kendall and Rachel Reeves aim to find substantial savings in this area, a backlash is almost certain. With the welfare bill soaring, ministers will frame their approach as a moral imperative—focusing on getting individuals back into the workforce. However, measures that may lean more towards punitive actions, particularly regarding eligibility and pushing people away from benefits, are likely to raise alarms among MPs across the party. Already this week, several MPs have voiced concerns to No 10.
This growing tension contributes to a pervasive sense of identity crisis within parts of the party. After such a prolonged period in opposition, Labour MPs had been filled with optimism that a significant majority would usher in meaningful change. Yet, the current trajectory has seen the international aid budget slashed in favor of defense spending, alongside an ongoing crackdown on welfare. “Many of these measures contradict our foundational principles,” laments one member of the 2024 intake. Regardless of the shifting circumstances, the solutions proposed by Reeves are likely to be met with resistance.
