Six months into her role as Chancellor, Rachel Reeves finds herself in a frustrating predicament—despite having access to the best minds at the Treasury and 11 Downing Street, the dial on the UK’s economic health is barely budging in the right direction. The solid growth of around 0.6% per quarter during Rishi Sunak’s leadership began to falter almost immediately after Keir Starmer assumed office with Reeves as his Chancellor.
Since July, the UK economy has seen just two months of growth—August and November, with November’s growth amounting to a meagre 0.1%. Projections from the International Monetary Fund (IMF) forecast just 1.6% growth for the UK in 2025, an improvement, but still far below the expectations set before the election.
As the UK continues to grapple with these sluggish numbers, another alarming sign is the surge in gilt yields—an interest rate on government bonds—which has risen by roughly 1% since last autumn. This is indicative of a growing unease about the UK’s financial stability.
Much of the economic turbulence can be attributed to factors beyond the Chancellor’s control. The re-election of Donald Trump, for example, is being seen as a game-changer that has added fuel to the global inflationary fire. Policies like tariffs and tax cuts are making it harder for the UK to access the interest rate cuts that are crucial for unleashing economic growth.
However, while external events have undoubtedly contributed to the UK’s economic woes, Reeves has committed several major own goals, which have made the economic situation more difficult than it needed to be. These missteps have diminished much of the goodwill the Chancellor inherited, especially from the business community after Labour’s election victory.
The first mistake was the tone Reeves set in the lead-up to the October Budget. Instead of offering an optimistic outlook, she repeatedly spoke of inheriting “the worst economic inheritance since the war.” This unnecessarily gloomy language sent the wrong message to consumers and businesses, killing confidence and halting investment decisions crucial for long-term growth. A more optimistic tone could have sparked hope and encouraged spending and investment.
The second mistake was setting the date of the Budget a full 118 days after the election—the longest gap in recent history. This long delay left a void filled by speculative policy proposals, such as a clampdown on pension relief and a reform of capital gains tax. These speculative discussions did little to inspire confidence and only served to distract the business community, already fatigued from a protracted election period.
The third misstep occurred within the contents of the Budget itself, which raised National Insurance contributions by £25 billion annually, significantly damaging private sector employers. While the Chancellor had limited options, having ruled out increases in personal or corporate taxes during the election campaign, the impact of the National Insurance hike was particularly harsh. This move dealt a blow to the private sector and largely negated any goodwill left from Labour’s early days in power.
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Despite these setbacks, not all is lost for the UK economy. Unemployment remains at historically low levels, inflation, while stubborn, is only slightly above the Bank of England’s 2% target. A rate cut looks increasingly likely next month, and Christmas trading reports from retailers and pub chains show that there is still money circulating in the economy.
However, the initial euphoria that followed Labour’s July victory has long since dissipated. Reeves must take some responsibility for the decline in optimism, although suggestions that she will be sacked are premature. For now, she remains in office, but the memory of Norman Lamont’s quick departure after his brief stint as Chancellor in 1992 looms large. Lamont’s ousting followed a series of disastrous by-election losses for Prime Minister John Major, and Labour could soon face a similar test.
The May council elections are crucial, as they will be the first major electoral test for Labour since the economy started showing signs of strain. These elections are poorly timed, falling just weeks after the National Insurance increase and significant hikes in the National Living Wage. As a result, Reeves has only a few months to turn things around. She must find a way to shift the economic narrative, encourage investment, and restore the nation’s confidence in its financial future. It is a big, perhaps impossible, task. But it’s one that the Chancellor must now face head-on.
