Cuts, tax rises and doing nothing: Rachel Reeves’ options to tackle economic woe
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Labour’s fiscal rules may limit the chancellor’s ability to act, but waiting it out may be the best option. The UK government has come under pressure from a bond market sell-off and the tumbling pound, heaping pressure on the chancellor, Rachel Reeves, to reassure investors about Britain’s economic and financial position.
After a challenging first six months in power for the government, the chancellor’s options have been limited by Labour’s political promises. There are a range of measures, of varying severity, the Treasury and the Bank of England could still take, depending on how market conditions unfold.
Reeves could yet catch a lucky break. Some City analysts believe financial markets have overreacted to the challenging economic and fiscal outlook. Donald Trump’s bite may prove less aggressive than his bark. The Office for Budget Responsibility (OBR) has yet to capture the financial market data used in its forecasts and will do so closer to 26 March – leaving time for conditions to subside.
Financial markets are pricing in two quarter-point interest rate cuts from the Bank of England this year. However, many analysts expect a weaker economic outlook could lead Threadneedle Street to cut borrowing costs four times in 2025. However, the situation could become more challenging after Trump’s inauguration on 20 January, should he take rapid action to announce sweeping import tariffs, which could in turn lead to surging inflation.
