When Rachel Reeves stood in the House of Commons on 30 October as the UK’s first female chancellor, she delivered a message of ambition and opportunity. However, four months later, she faces mounting economic pressures that threaten to derail her plans.
Since Reeves unveiled her budget, economic conditions have worsened both domestically and internationally. The Bank of England recently downgraded its UK growth forecast from 1.5% to 0.75%, while borrowing costs have climbed, putting additional strain on public finances. These challenges have reduced tax revenues while increasing the government’s debt obligations.
Market uncertainty has also contributed to concerns, with bond markets reacting nervously—though not to the same extent as during Liz Truss’s tenure. The £9.9bn financial buffer Reeves had set aside to adhere to her strict fiscal rules is expected to vanish when the Office for Budget Responsibility (OBR) updates its forecasts ahead of her spring statement next month.
Government ministers acknowledge the difficulty of Reeves’s position but see limited options available. International factors, including Donald Trump’s proposed tariffs and increased defence spending demands across Europe, further complicate the outlook, raising fears that external events could upend any strategy the government pursues.
Within Labour, there is recognition that Reeves has three immediate choices: raise taxes again, implement deeper spending cuts towards the end of this parliament, or abandon her fiscal rules. However, all three carry significant political risks.
Economists suggest Reeves is likely to be informed by the OBR that her financial headroom has disappeared, forcing her to either raise taxes or reduce spending. Rob Wood, chief UK economist at Pantheon Macroeconomics, warned that failing to take action could lead to market instability. “If the chancellor chooses not to act next month despite the loss of fiscal headroom, markets could react negatively,” he said.
James Smith, research director at the Resolution Foundation, echoed this concern, noting that Reeves’s commitment to strict fiscal rules leaves her with difficult choices. “Unpopular tax increases or cuts to public services and welfare are the likely options. Avoiding them could risk a loss of confidence in financial markets,” he said.
Reeves, however, has ruled out all three major approaches in her previous statements. She has repeatedly stated that Labour will not increase taxes on working people and has assured businesses that the government will not seek further tax rises. One potential option being considered by economists is extending the Conservative government’s freeze on tax thresholds beyond 2028. According to the Institute for Fiscal Studies, this could raise between £3.5bn and £4bn if national insurance thresholds were also frozen.
However, during her budget speech, Reeves had explicitly opposed this, stating that extending the freeze would “hurt working people.” She also pledged that Labour would “protect working people every single time” when making tax decisions.
On spending, both Reeves and Prime Minister Keir Starmer have committed to avoiding a return to austerity, making deep cuts to public services politically difficult. Reducing funding for the NHS, education, transport, or public sector wages would be seen as a reversal of Labour’s pledges.
Breaking the fiscal rules is considered the least likely option. A senior economist suggested that doing so could trigger significant market turbulence. “If she breaks the rules, markets could react strongly. She won’t let that happen,” they said.
The only hope for a way out of this financial squeeze is economic growth, according to Ben Zaranko of the Institute for Fiscal Studies. However, while government policies on infrastructure and investment may help in the long term, they are unlikely to provide immediate relief.
“The best way to ease fiscal constraints is economic growth,” Zaranko said. “The government has put forward policies aimed at boosting growth, but the benefits will take time to materialise. Unfortunately for the chancellor, they won’t arrive in time to solve the short-term challenges she faces.”
With the spring budget fast approaching, Reeves faces an unenviable balancing act—one that could define her tenure as chancellor.
Stay tuned to London Pulse News for updates on Rachel Reeves’s challenges as UK Chancellor, navigating mounting economic pressures and tough decisions ahead of the spring budget.
