The Rachel Reeves leadership of the Treasury is fundamentally little different from that of her more recent predecessors. Jeremy Hunt, Rushi Sunak, Sajid Javid, Philip Hammond, Nadhim Zahawi and Kwasi Kwarteng are some of the Conservative Party chancellors who failed to control public spending and led to repeated overshoots in deficits. One would have to go back to the George Osborne occupancy of number 11 Downing Street, to find a chancellor that exerted any real notion of fiscal discipline. Even then, Mr Osborne found out just how hard it was to keep a lid on expectations, with an electorate demanding better public services, but less than clear as to how this would be paid for.
Rachel Reeves is little different, front-loading generous spending pledges, with a 4% increase in real government outlays in FY2026, only for this to fall back over the second and third year. The pledge to increase real spending by an average of 2.5% over the three-year spending review is as hollow as it comes, from any politician. The public will expect the 4% increase to be rolled out in FY2027 and FY2028. And when the Chancellor tries to resist, the clamour for U-turns will grow. The winter fuel payment reversal shows this Lady is for turning. The pressure from left-wingers to reverse the cuts to welfare spending and disability benefits has predictably risen in response to this U-turn. If you give in once, your opponents will keep coming for you. Having set her stall out, the onus was on the Chancellor to hold the line, but she was cut asunder by her prime minister, who panicked at the recent local election results. Real political leaders look through the squall of what were not even ‘mid-term’ elections.
The big risk for financial markets, and particularly Gilts, is that Keir Starmer opportunistically decides (within a year) to dispense with Rachel Reeves, and tacks left, putting Angela Rayner into number 11 Downing Street. The deputy Prime Minister has already mooted tax increases (e.g. dividend taxes, new wealth taxes) that would further damage small businesses and job creation, and cement slippage towards a repeat of the 1970s era of low growth, high inflation, and much higher real Gilt yields.
