Reeves, the conjurer, may be about to drop her balls
Rachel Reeves, the much-lampooned British Chancellor of the Exchequer, delivered a highly political spending review, which is rightly subject to scrutiny. Indeed, the post-match analysis has been more Roy Keane than Alan Shearer, with some of the most ardent critics of the Tories, such as Paul Johnson at the Institute for Fiscal Studies, basically eviscerating the statement.
Ms., Reeves sounded almost delusional as she spoke to UK economic growth permitting the back tracking of the cack-handed partial reversal of the winter fuel payment scheme policy, further encouraging those that create little economic activity and wealth, to clamour for more not less benefit and welfare expenditure; ironically, in the big scheme of things, reforming the winter fuel payments was a good idea, one that should have been the first of many to improve UK government finances and prioritisation.
That mindset is leading to a potentially existential problem for the UK as entrepreneurs, innovators, and wealth generators, who already contribute the vast majority to the Exchequer’s coffers not only think about leaving but are already through the departure gate. The problem is that Government expenditure is too high, its multiplier and productivity is too low, and without recourse to further debt in the gilt market, which is unlikely, the only way to balance the books, if that is not an absurd phrase, is to raise taxes.
The Chancellor is somewhere between denial and speaking untruths when it comes to the next steps in her tenure, noting some shortening of odds, on Pat McFadden becoming the next inhabitant of No. 11 Downing Street. Her miss-steps, misunderstandings, and ideologies are creating the basis for summer of speculation around which taxes will rise, just when she needs consumers to spend more, to reduce the high Savings Ratio and boost economic growth. Such tax discourse is going to do little to make folks do so.
Indeed, just as Reeves spoke highly selectively as to the great job Labour is doing in power on economic matters, and to be fair, it inherited a car crash of a situation from the Tories, whose authority is and will be discredited, so ignored, for a considerable period of time, the ONS revealed a contraction in the UK economy in April. Whilst Q1 GDP growth was robust and, indeed stronger than expected, that preceded the Chancellor’s own tax increases, and so their effect, and the impact of Trump’s tariffs on the UK and wider world.
In Rachel’s myopic world, it was the US President that was the cause of April’s dip, but it was not Herr Trump that caused the quarter of million reduction in the payroll register that was reported by the ONS in the UK in the prior three months, a startling figure, which we must hope is a one-off because otherwise, the tax take and benefits bill will both go the wrong way.
What is ahead may be, therefore, concerning. The Office for Budget Responsibility (OBR), something of a contradiction in terms if ever, will most probably have to downgrade its expectations for UK GDP growth in 2025, it is an outlier in being too high in spring 2025, just as it was in October 2024, and that cut will erase Reeves’ insubstantial contingency for a rainy day, which means that her fiscal rules will break.
So, in the absence of a step higher for already elevated UK gilt yields, servicing national debt is now the No.2 item of UK Government expenditure, the matter of tax rises returns, and they may have to be substantial ones at that. Wealth, pensions, real estate, and entrepreneurs should be thinking on this front to the extent that they have not done so already.
More galling, is that the monies Reeves has allocated through her smoke & mirrors spending review, will, in all probability, not be well spent as central government, local government and the panoply of state agencies have very low capability levels, evidence is abound in the collapse of public sector productivity this decade.
All this is a worrying, nay gloomy, context for British business to operate, the State imposes responsibilities, consultations, and cost, with not enough in return, remembering that the Raynor Employment Bill is to come. Indeed, in the end, higher taxes are likely to raise less money as folks are disincentivised and leave, the cost of UK borrowing will further rise, and a political crisis of the Government’s own making feels like a growing outcome.
In the past, it would be the Conservative Party that would seek to bring order but it is a busted flush for now, the Liberals remain nice people who cannot make tough choices, the Greens live on another planet, and so now it appears increasingly likely it could be Reform, which has not shown it can run Lincolnshire County Council, never mind the country, that could be handed the baton… What could possibly go wrong?
Taxi…
Dr Clive Black
Senior Advisor
Coriolis Consulting
June 2025
