Rachel Reeves Warns ‘Difficult Decisions Ahead’ to Fix UK Economy

Joe Mayes, Philip Aldrick and Francine Lacqua
·5-min read

(Bloomberg) -- Chancellor of the Exchequer Rachel Reeves warned “difficult decisions” lie ahead as she tries to fix Britain’s public finances, raising the prospect of tax hikes or spending cuts in her first Budget in the autumn.

Most Read from Bloomberg

“I’m going to be honest about the scale of the challenge, I’m going to level with people,” Reeves told Bloomberg in her first TV interview since Labour won the UK election in a landslide two weeks ago. “I’m going to be different.”

Reeves, who is the UK’s first female finance minister, said she will update Parliament this month on her fiscal inheritance from the Conservatives and will also set a date for a Budget that will define Labour’s opening period in office. She’s taken charge at a tricky time, with the tax burden at a postwar high and Britain saddled with its highest levels of debt since 1961.

Given the tough economic picture, there’s an expectation that she will have to announce revenue-raisers or curb spending plans to keep the UK on course to hit its key fiscal target, which is to have debt falling as a share of the size of the economy in five years’ time.

“I’m under no illusions about the scale of the challenge,” said Reeves, a former Bank of England economist. “I’m not going to announce any tax breaks or tax changes without saying where the money’s going to come from.”

Labour swept to power promising a decade of “national renewal” after 14 years of Conservative-led governments. It was a remarkable turnaround for the party, which last won a general election when under Tony Blair. That has heaped intense pressure on Prime Minister Keir Starmer to deliver on what he has called his mandate for “change” after the years of Tory turmoil.

But with faltering public services in need of massive investment, there are political risks for Labour if it doesn’t show progress — despite having a huge majority in the House of Commons. British politics has become increasingly volatile through the financial crisis, Brexit and the pandemic, and the party’s new MPs know voters can switch sides yet again if the government stumbles.

That’s why Reeves and Starmer have said boosting economic growth is Labour’s key mission in government, arguing that would allow Labour to avoid having to make painful decisions on tax and spending to balance the books.

They’ve already announced planning reforms and a new National Wealth Fund to spur infrastructure and crowd in private investment. Those measures were part of this week’s King’s Speech, where Labour set out its legislative agenda with 39 bills covering areas such as renewable energy, housebuilding and railways.

In the interview, Reeves recommitted to Labour’s goal for the UK to be the fastest growing Group of Seven economy, but declined to repeat Starmer’s growth benchmark of 2.5% achieved the last time Labour was in power.

Yet economists are skeptical. Bloomberg’s monthly survey of 56 forecasters found they expect only slightly faster growth under Labour than under the previous Conservative administration led by ex-premier Rishi Sunak.

Reeves said her growth plan “depends on business and investors choosing Britain as a place to invest.” That needs stability, she said, pointing to the new “fiscal lock” legislation that will require the Office for Budget Responsibility to make an assessment if any government makes uncosted spending pledges or tax cuts of more than 1% of GDP, or around £30 billion ($39 billion).

The measure is a direct reference to the market turmoil triggered by Liz Truss’s unfunded tax cuts in her short-lived premiership in 2022.

“We need to unlock that private investment that business tell me they are ready to invest,” Reeves said. “There are no plans that I can draw up in my new office in the Treasury that are going to work unless we have business buy-in.”

Big investors like Aviva and Legal & General have already been responsive to Labour’s plans, Reeves told Bloomberg, and she said the involvement of the private sector was critical.

Given it’s too soon for Labour’s plans to impact Britain’s growth rate, Reeves has tricky fiscal issues to address in the short-term. They include decisions on public sector pay, fuel duties and healthcare and prison funding — and resolving those would cost up to £10 billion, according to official forecasts and think tank calculations. To fix public services over the long-term will need another £20 billion or more, according to the International Monetary Fund.

Still, what Reeves can deliver immediately is a marked shift in tone.

The chancellor reiterated that Labour wants to reset ties with the European Union to make it easier for British firms to trade in the single market. Mutual recognition of professional qualifications and reduced bureaucracy for cultural industries to tour the bloc will be a focus, she said.

The chancellor also said the UK is unlikely to copy tariffs on Chinese electric vehicles imposed by the US and the EU.

“We are a small open trading economy and we benefit from those trade links with countries around the world, both for exports and imports, but also for foreign direct investment,” she said. “Our view is that where possible we trade, we cooperate and we challenge in areas where it’s important to challenge but we don’t want to close the UK economy down to imports and exports. We benefit from those trade links around the world including with China.”

Asked if she would welcome a potential UK public listing by SHEIN, the Chinese fast fashion company accused of aggressive labor practices, Reeves didn’t reply directly but said regulatory changes announced last week would help stem the flow of companies opting to list overseas.

“I want Britain to be a place of choice to IPO and grow your business,” she said. “I want investors to look at Britain and see a country that’s got a stable government with a clear mandate to grow the economy and choose Britain as a stable place to invest in an increasingly volatile and uncertain world.”

--With assistance from Tom Rees and Andrew Atkinson.

(Updates with more Reeves comment from 12th paragraph.)

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.

Latest stories