Unlucky chancellor? Iran shock hits Reeves just as UK seemed to turn corner
The economy and public finances were on the right path, bond yields were falling, interest rates likely to drop further … then came the US-Israeli attack
Unlucky chancellor? Iran shock hits Reeves just as UK seemed to turn corner
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Donald Trump’s war on Iran is “folly”; shadow chancellor Mel Stride should be “lined up for the sack”; and the Liberal Democrat Daisy Cooper’s plan for managing fuel shortages is “fundamentally economically illiterate”.
Rachel Reeves has always relished a political fight, but in recent days she has been swinging at her opponents with what looks very much like enjoyment.
Her team say the chancellor’s righteous anger is calculated. The consequences of the conflict may still be being felt in many months and she wants to hammer home two claims: that “we did not start this war and we did not join this war”, as Reeves told MPs this week; and that before the bombs started falling, the UK economy was on the up.
“We have got to win the argument that the economy was turning the corner before the war and there was momentum behind it. We cannot lose that argument,” said a Treasury source.
Yet while Reeves’s fury has a political purpose, it may also reflect the frustration of a chancellor who had endured a tumultuous 18 months, and hoped to be emerging in 2026 into calmer waters.
Much of that drama was self-inflicted, including a botched move to cut winter fuel allowance and the stoking (and scotching) of rumours about an income tax rise in her autumn budget. But there have been significant external shocks too, including Trump’s tariffs; and now the war in the Middle East, that has upended the UK’s economic prospects once again.
All politicians must play the cards they are dealt, and there have been unlucky chancellors before Reeves – her Labour predecessors include Denis Healey, forced to ask the International Monetary Fund for a bailout; and Alistair Darling, who had to rescue much of the UK’s bust banking system.
But the timing of the latest global shock unleashed by Trump in the Gulf is particularly unfortunate. “Coming into this year, Rachel did feel confident we had the right plan: so she is going to say, ‘Yes I am pissed off,’” said an ally.
“Growth, unemployment, inflation, public finances: they were all just ticking the right way,” said Ruth Curtice, the chief executive of the Resolution Foundation thinktank.
She added: “Talking to business groups and economists in the private sector, we had this huge speculation in the run-up to the budgets … that has been causing uncertainty and a kind of wait-and-see approach. But if we get a few months of calm and, stability, then the money’s there.”
Much of this uncertainty was arguably down to the chancellor’s decisions – including to operate initially with slim headroom against her rules, giving the Office for Budget Responsibility (OBR) an outsized importance. Her Tory counterpart, Mel Stride, said: “Rachel Reeves can blame the world all she wants, but it’s her choices that have weakened our economy at the worst possible moment.”
Yet the aftershocks from two tax-raising budgets had begun to fade, and the revenues were rolling in. And as inflation fell back towards the 2% target, the Bank of England had been expected to cut interest rates another couple of times this year, reducing the cost of borrowing for households and companies.
Now with oil prices bouncing around at $100 a barrel for more than a month, the Bank’s next move is expected to be up – possibly as soon as next week.
“Not just from Rachel’s perspective, but also from the economy’s perspective, it does just feel like it really is the wrong moment for any shock because we were just kind of coming out of the last one,” Curtice said. “Also, really the wrong moment for a price shock, because we were emerging from stagflation vibes.”
Hard-won improvements in bond market sentiment towards the UK, which had helped to drive down the yield, or interest rate, on government borrowing, have also sharply reversed since the war started.
Perhaps half or two-thirds of the £24bn “headroom” Reeves built up against her fiscal rules by raising taxes significantly last autumn is likely to be wiped out by weaker growth and higher borrowing costs, if the crisis continues.
Sanjay Raja, the chief UK economist at Deutsche Bank, said the OBR’s forecast for GDP growth of 1.1%, published alongside last month’s Spring statement, looks hopelessly out of date today. “They were a bit more on the optimistic side, even before the conflict began, and now you’re looking at downside risks to growth, downside risks to the labour market, upside risks to inflation – and that’s not a great place for any chancellor to be.”
If she is still in No 11 to deliver a third budget this autumn, that could severely limit Reeves’s room for manoeuvre, at a time when there is intense pressure for higher spending, including on defence – and to shield the worst-hit households from the impact of the crisis.
Inside the Treasury, an Iran Board, chaired by Reeves and with senior ministers and advisers, is meeting twice weekly to discuss potential emergency measures. Publicly, she has made clear these will be “targeted”, in contrast to Liz Truss’s approach, which the chancellor argues ultimately cost households more by driving up borrowing costs across the economy as bond markets took fright.
“I reject the demands for a kneejerk response to this crisis that would put household finances at risk through higher inflation and higher interest rates,” she told MPs in a fiery House of Commons appearance on Tuesday.
Perhaps the prospect of an imminent Labour leadership contest, which could sweep her out of the Treasury in Keir Starmer’s wake, is also liberating Reeves.
Asked this week about whether she had shifted the “Treasury orthodoxy”, blamed by some Labour colleagues for catastrophic missteps such as the winter fuel fiasco, it was noticeable that she mused about “structural changes I’ve made which I hope will outlast me as chancellor”.
These include reforms to the Treasury green book that sets the rules for assessing the value of investment proposals, which had long been regarded as tilted against projects outside London and the south-east.
News last month that a portrait of Reeves, working on her first budget, has been acquired by the parliamentary art collection also had something of a valedictory air – she called the painting, by artist Sally Ward, “a fitting tribute to all that women have achieved, and a reminder of how much further we can go”.
Appearing at the National Growth Debate in the gilded surroundings of the Institute of Directors on Tuesday, Reeves was the final speaker in a programme packed with Labour politicians setting out alternatives to her economic plan. She was immediately preceded by Angela Rayner, who told the room full of MPs, business leaders and policy wonks that voters are fed up with “an economy and a system that is rigged in favour of vested interests”.
But Reeves, battle worn now after almost two years in post, cautioned Labour colleagues: “I do not want to go down the route the Conservatives went down of three prime ministers in five years and five chancellors.
“We said that economic growth has been built on the platform of stability, investment, and reform, but stability is the foundation of everything else, and that requires stable politics – and stable economic policy as well.”
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